07/10/2013 05:31 pm ET Updated Sep 09, 2013

Why Carl Icahn's Legal Gambit on Dell Shows Bad Faith and Is Not Shareholder Activism

In an earlier piece on Dell, I pointed out the danger of Icahn's recent moves on the company, which amount to pressuring the company to pay more than it can afford to buy back its shares. To finance the buyout, Dell would have to use up a big chunk of cash reserves and take on billions in new debt that can cripple the company's strategic moves in the future.

The Dell board, wisely, has resisted Icahn's efforts to raid the company. However, instead of accepting their verdict, Icahn has adopted an adversarial attitude that is the antithesis of long-term value creation. Not only has he threatened Dell with "years of litigation" if he does not get his way, but presented the courts with a surprisingly rookie argument: namely that the board did not run a fair process. Sour grapes, anyone?

More importantly, it shows bad faith towards a company that he should be a champion of. A simplistic, but apt, analogy would be a son suing his father for breach of paternal duty because the father refused to buy him a toy he liked. It is an egregious act that hurts the father and damages their relationship irrevocably. Even if Icahn truly believes that Dell is being undervalued under Michael Dell's proposal, entangling the company in a protracted legal battle will destroy more value; for one thing it can hurt the share price, for another it will lead to millions in legal expenses for Dell, and finally it is a needless distraction.

Part of the problem here is that the concept of shareholder activism itself has become twisted. The idea behind shareholder activism is to prevent CEOs and Boards from taking irresponsible actions that can damage a company's business prospects or even push it into insolvency. For example, if a CEO decides to acquire another company whose business does not fit strategically with his or her company, and the board approves that merger, that is value destruction and needs to be opposed. Similarly, if senior management pays itself exorbitantly despite poor performance or lack of innovation in a company, it is the shareholders' right to object.

But shareholders are also supposed to build companies and provide the fuel for long-term growth. That is the whole point of capital markets. What Icahn does, however, is not activism, but pure corporate raidership. His version of stewardship, as is evidenced clearly in the Dell case, is to load companies with debt in order to buy them out, siphon off as much cash as possible, and then slice up the body to sell off the parts. He did exactly that with TWA and while it might have served him well personally, it was far from a happy ending for many others.

In the case of Dell, three proxy firms have already recommended that shareholders vote in favor of Michael Dell's plan to buy out his company. For his part, the visionary founder believes that he can turn the company, whose fortunes have been flagging in recent years, around by diversifying into other business areas such as data storage and consulting. Whether Michael's strategy will succeed or fail remains to be seen, but the key thing is that it's a business strategy and not a purely financial one. And neither is it a silly legal gambit meant to distract the company from its actual purpose, which is to conduct commerce.

Icahn should back off with his opposition to the buyout, and if he really cares about his investment, roll up his sleeves and get involved in helping Dell grow. That would be true shareholder activism and would actually generate some value for everyone, including the American economy.

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