Dell takeover scrap opens glimpse into corporate governance

The Commercial Appeal (Memphis, Tenn.)
By Neil Irwin

WASHINGTON — One of the most important things that determines how competitive the economy will be in the longer-term is how corporations are run: Who owns them and how their executives are selected and compensated.

This rings true in the case of Dell Inc., the computer company facing one of the stranger corporate governance standoffs in recent times.

Regardless of what the future holds for Dell, a Texas company whose No. 2 shareholder is Memphis-based Southeastern Asset Management Inc., it is a case study in how the actual dealmaking that captivates corporate America doesn’t have any coherent theory behind it of what would make U.S. companies more competitive. [EXPAND Read more]

A quick refresher. Dell is a publicly traded company, its shares owned by millions of investors on Nasdaq. Its chairman and CEO is, and has been since its founding, Michael Dell, who also owns about 16 percent of those shares.

Dell the company had a long, successful run as a leading maker of PCs, but as more and more computing is done on tablets and cellphones, it has struggled to keep up. Its revenue fell to $57 billion in the most recent fiscal year, down from $62 billion a year before. Its share price has been pummeled; from about $18 this time a year ago to a recent low of less than $9 in November.

Michael Dell believes the market has been unfairly pessimistic about Dell Inc.’s prospects. Fair enough; the same could be said by plenty of executives. One solution would be to buckle down and prove the markets and doubters wrong by using your place in the CEO suite.

Michael Dell has taken a different path, setting up something strange: A battle for control of one of the world’s leading PC makers in which there is no coherent theory or offer as to what is wrong with that PC maker to begin with. He and private equity firm Silver Lake Partners have offered to buy out public shareholders to the tune of $13.65 a share, aiming to take the company private. A special committee of the board also has entertained other offers and, surprise, got two that are on the face of things better — $14.25 from the Blackstone Group and $15 from billionaire buyout king Carl Icahn.

What’s interesting about these competing offers is that they seem to offer directly contradictory theories of what is wrong with the corporate governance of Dell and how it can be turned around.

There can be any of several theories behind a buyout offer. One is that current management is incompetent. Another is that

the publicly traded governance structure is a poor fit for the company — that having to answer to impatient shareholders leads to management being unable to make good decisions for the longer term. A third possibility is that the acquirer is a competitor or in a related field, and they will be a better company through the combination.

None of the Dell bidders seems to be trying the third theory. They seem to be coming from different places on possibilities 1 and 2.

Icahn and Blackstone seem to embrace theory No. 1. They are convinced they can do better — so much so that they’re willing to pay more than the Michael Dell/Silver Lake group.

There isn’t a tinge of No. 2 in their theory. They both envision keeping Dell public, taking over the majority of shares but leaving a “stub company” of remaining public shareholders. The only thing that would go away would be the existing management team; that’s right, by trying to fully take over the company he founded, Michael Dell might end up losing control of it entirely.

The Michael Dell/Silver Lake group seems to have the opposite view of what ails Dell Inc. They apparently see ending the company’s publicly traded status as the crucial step to unlock hidden value in the company. After all, they are looking to keep Michael Dell as CEO, but to strip him of all those hassles attached to having public shareholders.

The Dell board will have to weigh these offers and choose whichever one it thinks is best for shareholders. But it also will be betting on which vision of corporate governance — different managers but still with public shareholders, or a private ownership group with the same managers — is the best one for one of America’s great business success stories of the last generation. [/EXPAND]