It is always interesting to watch a founder, largely because they will approach a corporate problem much more strategically than a hired CEO. The latter is generally focused like a laser on quarterly numbers and maximizing their compensation, where a founder is more likely to think of the company as their legacy and thus is willing to sacrifice short-term financial performance to assure the company will continue long term. This was showcased over the weekend when Michael Dell took to the media to defend his offer to buy back his company. He is clearly frustrated that a fraction of the stockholders can block the deal, not because there is a better offer, as there isn’t, but because some feel that by doing so they can force Dell himself to come up with more cash. I have watched this behavior in several firms over the years, from Yahoo to ClearCube, and the end result, for the stockholders, has always been really bad. Eventually, the folks trying to fund the deal get tired and walk away and the company valuation, which was being supported by the deal, falls off a cliff.
First Dell Q&A: It’s Getting Personal
Michael Dell did a lengthy Q&A for MoneyBeat over at the WSJ. Some interesting questions were not answered, like whether Michael Dell would sell his shares if he lost an anticipated proxy fight. Now I think such a loss is unlikely; it is one thing to try a proxy fight against a hired CEO, another to go after a founder in a company that bears his name. Yes, the Hewlett and Packard families lost their proxy fight against Carly Fiorina at HP, but she still lost her job and both founders were dead. The guy leading the fight for the family wasn’t a professional and still the vote was very, very close.
Founders tend to be very protective and litigious when it comes to their companies, making it unlikely Dell would sell his shares and instead use them to launch a variety of lawsuits against the then-new board and Icahn for doing what a corporate raider does, gutting the company. He undoubtedly has Icahn’s other holdings under review. If I were him, I’d have taken positions in any that appear to be intentionally mismanaged so as to document behavior that can be used in the Dell litigation.
In short, given that Dell’s family name is on the company, I sincerely doubt he would give up and go home should the unlikely event of his loss actually happen.
One other interesting thing is that, currently, folks that don’t vote effectively vote no, and Icahn has been promoting this behavior, promising the folks that don’t vote more money when the Dell deal concludes. But instead, his goal appears to be to force a no vote where, at least initially, these same stockholders will lose money. When you promise a thing based on a sequence of events that you know won’t occur, that seems an awful lot like fraud to me. I’ll bet it does to others also, particularly if large numbers of people lose money they can’t afford to lose.
The article closes with Southeastern, which recently cut its holdings in Dell in half while moving to block the Dell deal. It argues conflict of interest, which is a valid point, except no one has come up with a better offer and the fact that it massively cut its holdings suggests it doubts the path Icahn is on (if it didn’t, it would have increased its holdings instead).
Icahn is playing the short game, but founders play strategically. I really don’t think Icahn realized what he was getting into when he picked this fight.
Q&A Two: Not a Game
The second Dell Q&A was carried in Bloomberg and the interesting parts are in two sections. In the first, Dell is asked about Carl Icahn and he clearly is not a fan. He clearly thinks that the aggravation Icahn is creating is some kind of retired guy game. For Dell, this is his life and he appears to resent someone who has extra time on their hands and is using that time to make what is already a very difficult process, a leveraged buyout of a large company, much more difficult. Dell feels he needs to take his company private so he can restructure it for a market that has massively changed in the last couple of decades. Icahn, in contrast, just has the time and money, and wants to see if he can beat Dell. This isn’t tennis, and sticking a fork in a founder like this will have repercussions because it makes the whole thing personal. When you combine billionaires and personal fights, you get legal fees and cases that can last until one of them dies. I’ve been down this path before and I truly doubt Icahn is aware of the risk he is taking. You never make these things personal or the costs in time, aggravation and hard cash can reach legendary levels. Dell is clearly starting to take Icahn’s actions very personally and that could be ugly.
Another thing Dell points out is that if Icahn did execute his plan and Dell retained his shares, he’d be 9 percent short of a simple majority (any number of partners could fill that 9 percent gap). I don’t see that ending well for Icahn either. In that instance, I would expect Dell itself to move against Icahn and his partners and that would raise the cost and downside significantly for both.
Wrapping Up: This Could Get Uglier
The rule in most businesses and in politics is that you don’t go after family. If you do, it gets personal and very expensive. Dell Inc. is as much family to Michael Dell as his kids are and it is his creation. Having someone come in and mess with it and him just because he can isn’t going to sit well. And while Icahn often threatens to bury folks who disagree with him under a mountain of litigation because he is rich, his resources aren’t infinite, particularly his time.
Two clear mistakes were made by both sides. Dell should never have agreed to the clause he now wants removed, where non-voting shares were counted as no votes. This is what made what Icahn is doing possible. Icahn shouldn’t be taking on a founder this way; he has made assumptions based on decades of going after hired executives and has massively underestimated the personal risks associated with his move on Dell.
Fortunately, I see no real effect on Dell’s day-to-day operations yet, other than inability to aggressively move toward restructuring. So this is mostly drama at a distance, but it will likely change how LBOs are done in the future.