Dell's Biggest Investor Criticizes Special Committee's Process

The April 9 letter, from Southeastern Asset Management, argues that there are better offers on the table than the current $13.65-per-share deal with Silver Lake Partners for a leveraged buyout.

Dell issued a proxy statement last week detailing the background of the Silver Lake deal as well as other proposals from Icahn Enterprises and The Blackstone Group.

Related: Behind The Scenes Of Dell's Decision To Go Private

"We believe the proxy statement fails to make a case for shareholders to accept the $13.65 per share Michael Dell/Silver Lake buyout," wrote O. Mason Hawkins, chairman and CEO of Southeastern Asset Management, and G. Staley Cates, president and CIO, in the letter.

It is Southeastern Asset Management's second open letter to Dell since the Silver Lake deal was announced in February. Hawkins and Cates previously warned of a possible proxy fight and litigation if Dell continued with the Silver Lake deal.

"In our [first] letter to the Board, we stated that we would have been prepared to support a leveraged recapitalization and suggested it could have been done in the form of a $12 per share special dividend, a Dutch auction or another structure that would have allowed shareholders an opportunity to participate in Dell’s future. Despite the viability of such a transaction, the proxy statement shows that the board and special committee spent little time researching a leveraged recapitalization," Hawkins and Cates wrote in the April 9 letter. "The lengthy proxy statement only discusses the 'pros' and 'cons' of a leveraged recapitalization on a handful of pages and in only a cursory manner.

"The proxy statement also does not provide any real analysis or give any attention to solutions that would have either allowed shareholders to receive a large special dividend or to remain shareholders of a company with a smaller share base. It appears that neither the board nor the special committee aggressively pursued the leveraged recapitalization idea because senior management preferred a go-private transaction."

In addition, Southeastern Asset Management questions why Dell's board seems to focus on its End User Computing (EUC) business in the proxy and not its Enterprise Servers and Solutions (ESS) business, which Dell had previously highlighted as accounting for higher operating income than the EUC business.

"Given this change in public positioning, Dell's shareholders should question why the Board is suddenly focused on EUC, and not on ESS -- which was previously believed to be the future of the business," Hawkins and Cates wrote.

Dell has spent more than $13 billion on acquisitions of non-PC businesses, which Southeastern approved of at the time, the men wrote. But now long-term investors are not "being given the opportunity to participate in the return on that $13 billion investment," they wrote.

The men also wrote that the board's initial approach to limit potential acquirers to firms that would allow Michael Dell to remain CEO and retain a large stake contributed to a "price that undervalues the company."

"The special committee has obtained two preliminary alternative proposals, both of which we view as superior," Hawkins and Cates wrote. "We view these proposals as superior primarily because each offers shareholders the opportunity to remain owners of Dell while also offering a higher cash price to owners who chose to exit their investment.

"Southeastern urges the special committee to negotiate and evaluate these alternatives in good faith and to recognize that offering shareholders a choice is a win/win outcome for all parties. We can call upon the special committee to work hard to make this possibility a reality," they wrote.

PUBLISHED APRIL 9, 2013