Carl Icahn, relentless corporate raider, is back again and with a proposal that could put computer maker Dell on the road to becoming another Blockbuster or TWA.
To recap, Icahn notoriously killed Blockbuster's plans to expand their online service in favor of sticking to its bricks and mortar model, just when the world was changing. The result was that rival Netflix was able to win the race for online movie distribution and Blockbuster went into bankruptcy. The CEO of Blockbuster at the time (who was forced out by Icahn), John Antioco, maintains that this crucial misstep cost his company a chance at survival, and it is arguable that Blockbuster's powerful brand name would have posed a serious challenge for Netflix had Icahn not derailed the company's migration to digital distribution.
Fast forward to now and the company in Icahn's crosshairs is Dell, which its founder Michael Dell wants to take private. Having purchased 72 million shares recently, Icahn is now the second largest shareholder in the company, and has proposed that Dell buy back its shares at a price of $14 a share as opposed to Michael Dell's proposed $13.65 per share. Sounds like a good deal for investors, except that the financial engineering behind it is anything but good.
To fund the buyback, Dell will have to use up $7.5 billion of its cash reserves, take on $5.2 billion of new debt and sell off $2.9 billion of its receivables (likely at a discount). While Icahn is prepared to throw in $2 billion of financing from his side, and Jeffries may come in with $1.6 billion, this is not a creation of value for Dell. The resulting debt load, not to mention the depletion of valuable cash reserves needed to fund day-to-day operations and growth, could be a death blow to the company at a time when its position in a competitive market is of paramount importance. In fact, Icahn's leveraged buyout could seriously hamper Dell's strategic flexibility, and ultimately destroy long term prospects and value as it did in the case of Blockbuster.
Another concern should be Icahn's plans in the aftermath of the buyout. The problem with an excessive debt load is that it can necessitate the sale of valuable assets, if not immediately then in the near future, to service that debt. Here again, there is precedent to indicate what Icahn might do. His acquisition of TWA in 1985 resulted in a debt load for the company that forced a selloff of its assets and ended of course in the death of the iconic company. Dell may be a better company than TWA was at the time but even that will not shield it from the pernicious effects of leverage.
Carl Icahn is a smart man but his interests are not necessarily the same as those of other shareholders, nor of the companies that he raids. His modus operandi of buying into companies and stripping their assets or prettying them up for sale to higher bidders, even at the cost of loading unwieldy debt onto the company's books, can be disastrous. In an era of questionable corporate governance, shareholder activism is important, but the type of activism that Icahn represents is a cure that is worse than the disease.
SANJAY SANGHOEE is a political and business commentator. He is a banker, has an MBA from Columbia Business School, and is the author of "Killing Wall Street". For more information, please visit www.killingwallstreet.com
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