Investor Aims High With Price For Dell

By SHARON TERLEP, DAVID BENOIT and TELIS DEMOS

Dell Inc.'s largest outside shareholder faces an uphill battle in its effort to squeeze billions more out of the planned $24.4 billion deal to take the tech giant private.

Southeastern Asset Management on Friday laid out a case that Dell is worth $24 a share—$10 a share more than the current deal—and is urging other shareholders to join the opposition. If Southeastern succeeds, it could result in a richer deal for investors or an altered structure for the leveraged buyout.

The Memphis-based investment firm owns 8.5% of Dell's outstanding shares, and people familiar with discussions said the architects of the buyout aren't taking the firm's opposition lightly.

One problem, though: The last time Dell traded at $24 a share was in mid-2008.

Southeastern's pronouncement in effect sets up a game of chicken. If Dell and its buyers don't secure the needed shareholder support, the deal could cost the buyers more—or collapse altogether. If the deal falls through, shareholders risk seeing the deal premium evaporate and their holdings lose value.

Under the deal, the largest leveraged buyout since the financial crisis, Dell founder Michael Dell and the investment firm Silver Lake Partners are offering $13.65 a share to take the company private. The offer price represents a 25% premium to Dell's closing price the day before deal talks became public. But it is well below the more than $18 a share Dell's stock traded at a year ago.

On Friday, Dell shares were up 10 cents at $13.63 in 4 p.m. trading on the Nasdaq Stock Market.

A person familiar with the matter estimated that Southeastern paid an average price for Dell of about $16.90, when factoring in all accounts managed by the firm.

In a lengthy analysis filed on Friday with the Securities and Exchange Commission, Southeastern argued that Dell is worth more than the offer and that the company would likely generate a better return to shareholders if it were to sell pieces of the business. Southeastern also outlined other options it said would be more attractive to shareholders than the proposed buyout, including a one-time dividend funded with Dell's cash and some debt, or a buyout that gave current shareholders an opportunity to participate.

Dell on Friday said a special committee of its board "considered an array of strategic alternatives" and determined the proposed buyout is the best offer for shareholders. A Dell spokesman had no additional comment.

It isn't uncommon for shareholders to balk at a deal as a tactic to pressure buyers into making a higher offer. But shareholders have an uneven record in driving up the price of an initial offer for a company, data show, and Dell investors may be wary of shooting down the current deal amid a lengthy decline in the company's fortunes.

But Southeastern's efforts could be buoyed by discontent from other investment managers, many of whom bought stock at a much higher price than the offer.

Some smaller shareholders have already said they will oppose the deal. "I think this is going to be a close vote; this is not going to be a runaway for Michael Dell," said Richard Pzena, co-chief investment officer at Pzena Investment Management Inc., which owns less than 1% of Dell as of the most recent public filing, according to Ipreo, a capital-markets data firm. He said he planned to vote against the deal.

"I think they're counting on the notion that people are going to be afraid that if the deal falls apart, the stock price is going to go down," said Mr. Pzena. "I don't think it's going to go down, or [it will] go down very little, given how strong the other lookalike tech stocks have done since this deal came about."

The extent that Southeastern is able to influence the deal should become clearer in coming weeks as each side works to line up allies, but a resolution could be months away. Dell has 45 days to shop for a bidder with a better offer under a provision of the agreement intended to ensure shareholders get the best deal.

The shareholder vote on the deal will require the majority of the shareholders to support the deal, excluding about 16% of shares held by Mr. Dell, his family and other insiders.

Southeastern is the largest independent shareholder in Dell, and said in a filing it holds an 8.5% stake, though Southeastern lacks voting rights on a small portion of those shares.

According to one estimate, 20% of shares are in the hands of shareholders who would benefit from a sale. After word first emerged of a buyout some three weeks before the deal was announced, more than half of Dell shares changed hands, said Sanford C. Bernstein analyst Toni Sacconaghi. He estimated that it is likely more than 20% of shares are now in the hands of merger-arbitrage traders, who bet on minute price changes ahead of a merger and who are likely to support a deal. Mr. Sacconaghi said it "would be difficult" for Southeastern to gather enough support to block the deal.

Some 58% of shares are held by investment managers, according to S&P Capital IQ, funds like T. Rowe Price Group Inc. and BlackRock Inc. These and other big firms haven't indicated publicly where they stand.

—Jason Zweig contributed
to this article.

A version of this article appeared Feb. 11, 2013, on page B1 in some U.S. editions of The Wall Street Journal, with the headline: Investor Aims High With Price For Dell.