What Icahn Sees In Dell

The battle for Dell , quiet since private equity firm, Blackstone, backed out of the fight last month, is heating up again.

Last night Carl Icahn and Southeastern Management sent an alternative buyout plan for Dell--the beleaguered computer maker that is proposing to be taken private by its billionaire founder Michael Dell and Silver Lake management for $13.65 a share. Icahn's deal would offer $12 a share plus leave part of Dell publicly traded. You can read the whole messy back story here and here.

But the point of this post is to answer this question: why does Icahn still want Dell?  Icahn told FORBES he heard about  Dell's plan to go private just like  everyone else --it dominated every headline in the country. He read the tales of how bad the Dell was doing and how Michael Dell could not turn the company around under the white-hot scrutiny and short term demands of the public markets. But Icahn, the 77-year-0ld market veteran who's made $25 billion through four decades of contrarian bets, saw a different story--that Michael Dell was trying to buy back his company on the cheap.

Icahn and his team did their research, and in March he laid out his thesis to Nathan Vardi and I. It goes like this: Indeed the PC business is dying, and while Dell missed the tablet boom, it did see the coming of cloud computing and invested roughly $14 billion into the sector. Icahn says that Dell estimates a 15% return on that investment--a return that has not yet hit the balance sheet. Icahn thinks that Michael Dell wants take his company back cheaply before that new cloud-computing investments start paying off.  That's why Icahn likes Dell, and why he wants to keep a portion of the company public--so he, and other owners, can enjoy the cloud computing revenue wave due to hit the firm in the coming years.

As he told FORBES in our April 15th cover story, Icahn thinks Michael Dell's attempt to take his eponymous company private could severely backfire on the computing billionaire. "Michael may have messed himself up,” Icahn told FORBES this March. “He put himself in a position where he may lose his company, since normally it would have been very hard to take his company away, because he owns 15%.”

Dell  could very well lose it if Icahn gets his way. And Icahn has allies. Beside Southeastern, which teamed with Icahn in his activist stance on Chesapeake Energy , I've hear that other large stake holders (many who've had their faces ripped off in the Dell trade) don't want  to settle for Dell's purposed $13.65 per share buy out. Sure, the cash is great--but they too love the idea of keeping part of the Dell public to get a piece of that upside potential if the cloud bet does pay off so they can salvage at least part of their investment.

Dell and Silver Lake still have the leverage in this fight, but don't expect to see Icahn and Southeastern waving the white flag anytime soon.