Blackstone Bows Out, Playing Silver Lake's Tune

By Liz Hoffman

Law360, New York (April 19, 2013, 5:59 PM ET) -- And then there were two.

The Blackstone Group LP dropped out of the bidding for Dell Inc. on Friday, leaving Carl Icahn as the only challenger to Silver Lake Partners' $24.4 billion buyout offer.

The way it did so — claiming it could find no more value in the struggling PC maker than Silver Lake already had — likely boosts Silver Lake's prospects and could even give the firm grounds to reopen negotiations at a lower price, attorneys said.

In a letter sent to Dell's special board committee, Blackstone cited the Texas-based company's "rapidly eroding financial profile," noting it was particularly troubled by a 14 percent decline in computer sales, Dell's biggest quarterly drop ever and out of whack with internal management projections. Dell's operating income — a key metric for private equity firms looking to load a company up with debt — was recently slashed from $3.7 billion to $3 billion for the current fiscal year.

Blackstone had made a preliminary bid during Dell's go-shop window. It said it might be able to pay more than $14.25 per share, and envisioned rolling over some of the company's existing shareholders.

"It seems like Blackstone got in there and did due diligence, and what they saw really spooked them," said one New York attorney, who asked not to be identified because of ties to the parties. "Either way, it plays into what Silver Lake and Michael Dell have been saying all along."

That mantra has been that the current $13.65-per-share offer fairly values Dell's future earnings potential. Silver Lake has stressed — sometimes too much, the deal's critics have said — that Dell's slumping PC business has eroded more quickly and sharply than expected.

A second lawyer, not involved in the transaction but familiar with Blackstone's deal-making strategies, said the reputational damage of the firm's short-lived bid pales in comparison with getting wrapped up in the antics of Icahn and Southeastern Asset Management Inc. Both have pledged a long fight against the Silver Lake bid, including a proxy contest, litigation and exercise of their appraisal rights.

"If you're Blackstone, you don't want to lose a public fight," the lawyer said. "If you walk away now, you can blame it on the company and live to fight another day."

It's also worth noting that Blackstone had little on the line. Its transaction expenses up to $25 million are being covered by Dell, part of the special committee's efforts to run a robust go-shop period.

"Easy in, easy out," the second lawyer said. "It might be worse to end up in a three-ring circus with Carl Icahn. Blackstone is good at finding good deals, and they'll find another."

Indeed, Blackstone has stoked speculation in recent days that it may have its eye on something else. The investment firm's president, Tony James, told reporters earlier this week that Blackstone is "serious about tech" and that the sector is a "rich hunting ground for private equity." He also said that he expects technology companies to grow at a faster rate than the economy as a whole.

The recent hiring of Dell's former mergers and acquisitions chief Dave Johnson earlier this year has expanded Blackstone's industry team.

Others were more cynical about Blackstone's bow-out. The Shareholder Forum, an organization that promotes open information for investors, has been battling Dell's board for access to company records in order to get an independent financial analysis of the buyout. Its chairman, Gary Lutin, said some of its participants viewed Blackstone's late entrance and quick exit as an attempt to validate the current bid.

"Many forum participants had been skeptical from the beginning about one of the world's biggest and most professionalized private equity firms suddenly deciding to start a publicly disorganized scramble to bid on a deal they'd been aware of for months," Lutin told Law360. "Having negotiated a $25 million contract for Blackstone to show up on the set just makes the whole thing look like a scripted reality show."

Either way, Blackstone's exit is more good news for Silicon Valley-based Silver Lake, which this week closed the biggest-ever technology private equity fund at $10.3 billion.

With its core thesis — that Dell's reliance on a shrinking PC market spells short-term trouble for public shareholders — validated by Blackstone's letter, the firm has more support when negotiating with critical Dell shareholders like Southeastern and T. Rowe Price Group Inc.

It may even be able to go lower in price, some attorneys said. The same financial data that scared away Blackstone may constitute a material adverse change under the signed merger agreement.

Although the document's definition does not include a failure to meet financial projections or a decline in the company's stock price, the buyer can consider the underlying causes of these events. 

In other words, bad financial news in and of itself aren't grounds for reopening price negotiations, but the problems that cause it might be. Dell was trading Friday about 20 cents below Silver Lake's offer, suggesting investors think the buying group might not hold steady at $13.65.

While Icahn's plans are unclear, Dell's board has said it already considered and rejected a recapitalization like the one the billionaire is proposing. And Icahn agreed earlier this week not to grow his stake above 10 percent.

"The special committee will continue to oversee its process to ensure the best possible outcome for Dell shareholders," the company said in a regulatory filing Friday. "It also will continue discussions with the entities affiliated with Icahn Enterprises [and], if presented with a formal merger bid ... will determine whether it is a superior proposal to that of Michael and Silver Lake."

Blackstone's exit is the end of the line for Kirkland & Ellis LLP, too, which had landed its first major deal for Blackstone. The investment firm was also advised by Morgan Stanley.

Dell's special committee is advised by Jeffrey Rosen, William Regner and Michael Diz of Debevoise & Plimpton LLP, with JPMorgan Chase & Co. and Evercore Partners Inc. serving as financial advisers. Evercore is advised by Michael Aiello and Matthew Gilroy of Weil Gotshal & Manges LLP, and JPMorgan is advised by Alan Denenberg of Davis Polk & Wardwell LLP.

Dell is represented by Hogan Lovells, with Goldman Sachs & Co. acting as financial adviser.

Michael Dell is represented by Martin Lipton and Steven A. Rosenblum of Wachtell Lipton Rosen & Katz.

Silver Lake is represented by Rich Capelouto and Chad Skinner of Simpson Thacher & Bartlett LLP, along with Bank of America Merrill Lynch, Barclays PLC, Credit Suisse AG and RBC Capital Markets.

Icahn is represented by in-house counsel.

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