Dell buyout just got (much) more complicated

If Michael Dell and his cohorts at Silver Lake Partners thought their $24 billion buyout plan for Dell(s dell) announced a month ago would be a slam dunk, they have another think coming.

Several other interested parties have surfaced, including billionaire Carl Icahn, and when Icahn gets involved things definitely get more complicated. In a letter to Dell’s board Icahn said the existing offer substantially undervalues Dell’s worth.  Icahn put forward his own suggestion that  the company remain public and issue a $9 per share special dividend, as reported in Bloomberg. Blackstone Group LP has also reportedly expressed interest in Dell.

If Dell’s board does not agree to his proposal, Icahn vowed “years of litigation.”  He is not the only disgruntled shareholder. Southeastern Asset Management, which owns about 8.4 percent of Dell shares, maintains that the “take-private” price of $13.65 per share is not enough and reiterated its “demand that the Board of Directors pursue proposals that are more favorable to shareholders,” according to a note from Wells Fargo analyst Maynard Um. As of Thursday Dell shares were trading at $14.27, well above the offer price.
DELL Chart

DELL data by YCharts

Dell hardware rivals Hewlett-Packard(s hpq) and Lenovo have also taken an interest in Dell, although whether they’re doing so more to get a chance to gather competitive intelligence from Dell’s books or if they’re genuinely interested in an offer is a huge question. The thought of HP buying Dell after its recent travails is mind boggling, but then again it’s done a lot of mind-boggling things over the past few years.

One former Dell executive, speaking on condition of anonymity, has been critical of the buyout from day one. In his view, this deal was done solely to benefit the new owners at the expense of shareholders. “The management team will trim the fat and resell [what’s left] in a better operating margin scenario … Dell is playing out the buy low, sell high scheme,” he noted. However, he also maintained that the risk is high for the buyers. Things are changing fast, and the market may be cleverer than they are, he added.

It is somewhat astonishing that Dell, once the world’s largest PC company, finds itself in these straits. But then again, legacy players from the last IT era — HP, Cisco(s csco), Microsoft(s msft), Oracle(s orcl) and IBM(s ibm) — are all in the same boat. The technology world has shifted under their feet to a world of low-priced scale-out hardware and open source software with substantially lower margins. The advent, first of virtualization and then cloud computing, means that individual companies no longer have to buy nearly as much hardware gear as they used to and  it’s by no means clear that all of these legacy powers will survive, let alone prosper.