Icahn Has a Better Dell Turnaround Plan Even if He Loses

NEW YORK ( TheStreet) -- Struggling PC-maker Dell ( DELL) still has the ability to turn itself around in the mold of IBM ( IBM) under Lou Gerstner or Apple ( AAPL) when Steve Jobs re-took the helm of the iPhone maker. The company also could go the way of bankrupt Kodak or Nokia ( NOK), according to billionaire activist investor Carl Icahn and Southeastern Asset Management.

Icahn and Southeastern, in a presentation to Institutional Shareholder Services, continued to outline why they see a $14-a-share tender offer for up to 72% of Dell's shares as superior to a $24.4 billion takeover being orchestrated by private-equity giant Silver Lake Partners and founder Michael Dell.

While Dell has definitively supported the financial terms of the Silver Lake deal and recommended it to shareholders, Icahn may very well have a better turnaround plan. In fact, the legendary activist may be presenting a strategy for Dell that could be useful for scores of struggling hardware, networking and software companies.

Icahn argued Dell should increase its pace in a race-to-the-bottom of PC-market margins, while using the terminal cash flow from the declining unit to fund a push into higher margin and more sustainable enterprise software, services and IT security businesses. To tide Wall Street over, the activist advocates Dell release its billions in its overseas cash to shareholders, in a move that adds leverage to the company and consequently its prospective equity returns.

Already, Dell's patient shareholders have done much of the heavy lifting, Icahn argued, given $10.3 billion in cash the company has used over five years to acquire higher margin businesses. Those acquisitions now count for $9.3 billion in new Dell revenue and are growing at about a 90% annual compound rate, according to Icahn and Southeastern's presentation to ISS.

A takeover, Icahn argued, leaves Dell shareholders in the shift if the company can execute on the turnaround they've funded. Meanwhile, it adds more debt to the company without any new strategic focus.

Are Dell's shareholders to blame for the company's plight, or is it current management, which has wasted billions on share buybacks, hoarded the company's cash abroad and done amazingly little to move into the high-growth mobile market?

Why should Dell shareholders fund CEO Michael Dell's mismanagement since he re-took the reins of the company in 2007, only to see him construct a deal that could generate a significant profit by simply ending the company's value destroying ways, Icahn asked.

The activist's evocation of the turnarounds at Apple, IBM and even Xerox ( XRX) and Hewlett-Packard ( HPQ) are compelling.

While IBM sold off its PC business, Icahn argued Dell simply run it into the ground, squeezing out the unit's cash flow to support a shift in focus. He further argued acquisitions such as Xerox's 2009 deal for business process outsourcing giant ACS are crucial to a turnaround, while a focus on the long-term over the short-term recently instituted at HP under CEO Meg Whitman will serve Dell.

Not known for his humility, Icahn would also have done well to point out his work in the breakup, sale and realignment of Motorola, which stands out as one of the more impressive tech turnarounds in recent years.

Icahn generally amazes Wall Street with his scorched-earth brand of investing and his cavalier approach to the oftentimes polite and insular world of finance. In the instance of Dell, however, the billionaire activist is the optimist and Dell's current management is the pessimist.

Nowhere in Michael Dell and Silver Lake's plan presented to current shareholders do they outline how they expect to revitalize Dell. Instead, they simply outline the risks Dell currently faces as the PC-market withers and the company increases its debt burden.

Given Dell's full support of the Silver Lake-led deal after an independent review, maybe the takeover consortium doesn't have to present a case for the future and, instead, only an argument why shareholders should be fearful of the present.

Silver Lake and Michael Dell have won over both Dell and a special committee running its sale process with their firm financing commitments and short-term shareholder returns.

Icahn, now Dell's largest independent shareholder, Southeastern Asset Management, T. Rowe Price, Yacktman Asset Management and Pzena Investments aren't buying the deal. Those shareholders, generally based far from Wall Street, oppose Silver Lake's takeover and own about 20% of the company's outstanding shares, according to Icahn's presentation.

Attractive financing arrangements and a focus on the present-day, after all, likely would drive the eventual profit of Dell's takeover consortium.

Icahn had tried to borrow from his competitors in a leveraged shareholder buyout proposal, of sorts, that could have given ordinary investors access to the financing markets that are driving private-equity industry profits.

Dell didn't agree with Icahn's calculations and the company's support of Silver Lake's $13.65-a-share takeover offer may indicate to the financial press Icahn is all but out of the running for the company.

Now that Icahn is relying on shareholder support for his strategic vision and changes he can make to Dell in public markets, it will be interesting to see if those following the company's takeover have gotten the story all wrong.

The credibility of Silver Lake and Michael Dell's takeover offer rests on their firm financing commitments. In contrast, the strength of Icahn's proposal is in the activist's long-term vision for current shareholders.

-- Written by Antoine Gara in New York.

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