Billionaire founder Michael Dell
You might think it was all billionaire Michael Dell's idea to take his eponymous PC company private. Think again. Southeastern Asset Management, the company's second largest shareholder, actually discussed the possibility of a buyout months before Dell started working on the matter, according to the new proxy filing from Dell.
A Southeastern representative contacted Michael Dell in mid-June 2012 to talk about the proposal. Dell questioned Southeastern on the mechanics of what it suggested, prompting Southeastern to send spreadsheets laying out its investment idea. Southeastern also emphasized that it wanted to participate in any go-private deal by rolling over a portion of its shares. Dell said he'd think about it.
Two months later, the founder sat down to talk with Silver Lake Partners. By January, Dell had hooked up with Silver Lake—bankers assured him that the private equity firm possessed both the necessary skills and money—and soon offered $13.65 a share in a $24.4 billion buyout. Dell hadn't spoken with Southeastern in months, and he left the investment shop out of his plans.
When rumors about the buyout bubbled, Southeastern contacted the company to express its discontent over the deal. A subsequent SEC filing by Southeastern showed just how peeved the $33-billion asset manager was. In it, Southeastern basically contends that Michael Dell's $13.65-a-share buyout would allow him to steal the business from shareholders. Southeastern put a far higher figure on Dell's true worth: $24 a share.
Not a number plucked from thin air. That's close to the cost-basis that market-data firm Ipreo figures Southeastern paid to amass its 14.6 million shares. Forbes put the cost slightly higher, estimating Southeastern could lose almost $1 billion if the buyout happened. Southeastern contends the loss would be far less, only around $300 million.
But why Silver Lake and not Southeastern? Well, Silver Lake is synonymous with technology deals. Founded shortly before the web bubble burst, the PE shop's headquarters are on storied Sand Hill Road in Menlo Park, Calif., and the firm has stakes in Skype, Avaya and Sabre Holdings. By contrast, Southeastern is known more for investing in businesses than running them. Through managed accounts and three mutual funds, Southeastern holds positions in companies like Loews, Directv, FedEx and Consol Energy. The asset manager is known for a hands-on style, though. It will often become activist, cajoling for changing and demanding board seats--hallmark tactics of the two smart, reclusive managers (Staley Cates and O. Mason Hawkins) who manage the firm. Recall that Southeastern recently orchestrated the shift which forced out ex-billionaire Aubrey McClendon from Chesapeake Energy. So, make no mistake: Cates and Hawkins aren't fools. They just aren't as immersed in technology as Silver Lake.
Dell certainly needs all the expertise it can get. The proxy painted a dire situation, showing a management team that seems flat-footed and unable to compete in an industry losing market share to mobile devices. Dell missed management revenue projections for seven consecutive quarters through mid 2012, a period in which, except for one quarter, it also missed analysts' estimates. And just in the last year, the 2013 operating-income forecast was lowered from $3.75 billion to $3 billion. All this, presumably, is why Michael Dell sees Silver Lake as a good match. Perhaps the PE shop will know how to solve all this.
Southeastern, meanwhile, sure hasn't taken its lumps quietly. It sparked a shareholder revolt against the deal. The opposing group quietly grew to even include T. Rowe Price, which never gets involved in these sorts of skirmishes. The revolutionaries now control a roughly 15% stake, and, perhaps more importantly, two others—Blackstone Group and billionaire activist investor Carl Icahn—have offered competing bids for Dell.
Yet even as Southeastern was publicly indignant about the whole matter, it was asking Silver Lake to join the buyout group at a much lower price than that $24 a share level. Southeastern, indeed, wanted in at $14 to 15 a share. Silver Lake said no.
Reach Abram Brown at abrown@forbes.com.
