Dell’s Mathematical Argument Against Plan From Icahn and Southeastern

As Dell prepares to defend its $24.4 billion sale to its founder, the computer company took a big swipe at two of its biggest investors, who oppose the leveraged buyout.

In a presentation filed with regulators on Wednesday, Dell argued that an alternative plan by Southeastern Asset Management and the billionaire Carl C. Icahn would leave shareholders stuck in a still-public Dell whose coffers and performance continue to decline.

Southeastern and Mr. Icahn, who together own over 12 percent of Dell, have called for a dividend payout of $12 a share, either in cash or in additional stock. That would leave the computer maker publicly traded, but with dramatically fewer shares outstanding, in what financiers commonly call a stub.

In presenting their proposal last month, Southeastern and Mr. Icahn derisively called the $13.65-a-share offer from Michael S. Dell and the investment firm Silver Lake “the great giveaway.”

But Dell reiterated in its presentation that a special committee of its board had considered and discarded alternative ideas, including a special dividend. And it contended that the Southeastern-Icahn plan would load too much debt onto Dell while sapping its cash flow and making its stock more thinly traded.

In one page in particular, Dell calculated that the debt required to carry out the alternative plan did not accurately account for debt payments the company must make, as well as cash needed for operations and other requirements. Instead of $17.3 billion in cash available to Southeastern and Icahn, the company contended, only $13.4 billion would be usable.

That would leave Dell with a potential $3.9 billion hole in its balance sheet if the special dividend plan were enacted.

Dell also pointed to the example of Clear Channel, where two private equity firms agreed to leave a stub as part of their leveraged buyout. That stock, which has been harder to trade because of fewer outstanding shares, has fallen 69 percent since August 2008.

In its presentation, Dell argued that the alternative plan presented a “dramatically elevated risk profile and uncertainty for existing Dell shareholders.”

Still, Southeastern and Mr. Icahn are betting that enough shareholders will agree that the take-private bid by Mr. Dell and Silver Lake is too low.

One factor they are counting on is the high support required for the leveraged buyout to pass. Mr. Dell cannot vote his stake of roughly 16 percent in favor of the deal, meaning that a “majority of the minority” of shares outstanding must vote affirmatively for the deal to succeed.