Can Michael Dell Win Against Carl Icahn?
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You can tell that things are getting serious if Carl Icahn is suing Michael Dell. Who’d have thought the two would transition their battle from the board room to the court room. Michael Dell wants to move the date for when a vote by a shareholder is counted to Feb. 5, 2013. This is the cut-off date for shareholder privileges to vote for or against the Michel Dell takeover of Dell (NASDAQ: DELL).
Carl Icahn of Icahn Enterprises (NASDAQ: IEP) has managed to postpone the voting date. Michael Dell is hoping that shareholders will vote in favor of a $13.75 per share takeover.
It’s all about the details
"My personal reaction, bombastic," said Larry Hamermesh, a professor at the Widener University School of Law in Wilmington, Delaware, referring to the lawsuit. "The linchpin of it seems to be that it's inappropriate to move or create a new record date because that takes advantage of a cynical effort to put shares in the hands of arbitrageurs who will want to vote for the deal."
Hamermesh pointed out that the judge who is likely to take this case, Leo Strine, often made the point in the takeover battle by industrial gases companies Air Products of rival Airgas that arbitrageurs are shareholders with the same rights.
Okay, so here’s the most important point. The judge that’s going to evaluate the case is going to operate under legal precedent. Here’s how Wikipedia defines legal precedent:
In common law legal systems, a precedent or authority is a principle or rule established in a previous legal case that is either binding on or persuasive for a court or other tribunal when deciding subsequent cases with similar issues or facts. The general principle in common law legal systems is that similar cases should be decided so as to give similar and predictable outcomes, and the principle of precedent is the mechanism by which that goal is attained.
In previous legal cases, the judge has already ruled that in a takeover battle, every shareholder has the same rights regardless of their motive, even if the whole purpose of owning the shares is to take advantage of arbitrage. In this instance, based on previous rulings and legal precedent, it can be assumed that Michael Dell cannot strip the rights of Carl Icahn from the right to vote against his takeover bid.
What to expect if the takeover doesn’t happen
So, there’s a pretty high probability that the take-over may not actually happen, especially considering the sheer amount of ownership that Carl Icahn has.
In a previous article, I had mentioned that the share buyback proposal could boost the value of the stock. I had estimated that the share buyback will reduce shares outstanding from 1.8 billion to 700 million, and that’s if the shares are bought out at $14. If the share buyback is implemented and analyst forecasts for fiscal year 2013 are accurate, I believe that the company will be able to boost its earnings per share to $2.57 per share.
Why Microsoft wouldn’t want this to happen
Microsoft (NASDAQ: MSFT) wants Michael Dell to take Dell private. Microsoft even provided a $2 billion loan to Michael Dell, and Silver Lake to ensure that this happens.
Microsoft believes that under the leadership of Michael Dell, computers could take a different course. After all, Dell has the third-highest market share, so it should still have some influence. However, I am not completely sold that the Microsoft and Dell duo will generate any significant gains for shareholders.
This is because the Windows ecosystem is pretty much set. You can’t have it teeter too much. Microsoft is lending money to maintain influence and to keep the ecosystem the way it is. I am highly doubtful that Michael Dell can create some unique way to stimulate demand for Windows 8. The growth in Windows 8 will have to come from emerging market economies, but will be negatively impacted by tablet devices.
Most of the growth in computers is coming from entry-level computers (tablets).
Source: IHS iSuppli Research
The mobile ecosystem is substantially cheaper, which will make it difficult for Microsoft to record some gains in the traditional x86 computer space.
The total cost of manufacturing an iPad mini is $198. If a tablet is cheaper, just as functional, more mobile, and has 4G internet capabilities, what is the point in owning tower computers in emerging markets? Even worse, the good folks at Apple have a better marketing team than Dell.
Sure, some people legitimately need a desktop computer. But more and more, folks are plugging in keyboards into tablets and are calling it a computer.
The Carl Icahn proposal has the most upside potential from a return on investment perspective. Taking Dell private isn’t the answer. Michael Dell ran the company as CEO for long enough. It’s the responsibility of a CEO to look for sustainable avenues of growth. If a CEO fails in public, I have no idea how a CEO is going to succeed in private.
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