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Dell board warns Icahn bid may leave the firm short of cash

A plan proposed by Carl Icahn and Southeastern Asset Management last week as an alternative to Michael Dell's proposal to take his namesake company private would leave it short of cash, Dell's board warned the bidders on Monday.

It wants to know more about the proposal—including who the bidders plan to put in charge of the company—before it can formally evaluate it, the board told the investors in a letter made public Monday.

The company is already considering a proposal from founder Michael Dell and private equity firm Silver Lake to take the company private, and under the terms of that deal cannot formally consider any new bid unless it appears to be a superior proposal.

Serious bid or plan B?

It's not clear whether Icahn's plan is intended as an actual acquisition proposal that the Board could evaluate and potentially endorse or accept, or as an alternative it could consider if the pending sale to Silver Lake and Michael Dell fell through, the Special Committee of the Board of Directors wrote in the letter to Icahn and Southeastern.

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The committee asked Icahn for a draft of the definitive agreement concerning the proposed transaction, and for details of how Icahn and Southeastern planned to finance it. It also asked who they planned to put in charge of the company, and what role the senior management team would play in arranging the financing.

The proposal made last Thursday will leave Dell short of working capital and potentially without the means to pay off $1.7 billion in debt maturing within 12 months of the deal's closing, the committee wrote. In addition, the proposal does not appear to consider additional borrowing needed to make up for use of the company's cash in the transaction, nor that the proposed sale of accounts receivable will reduce future cash flows, it wrote.

The committee also questioned Icahn's assertion that holders of at least 20 percent of Dell's shares will choose to receive additional shares rather than the $12 per share windfall Icahn proposed. Icahn, Southeastern and affiliated entities appear to control around 12 percent of the company's shares, the committee wrote. It asked for either proof of the commitment of the other 8 percent, or for Icahn's plans to finance the additional windfall payments.

Shareholders tempted to accept additional stock under Icahn's plan—if it becomes a firm proposal—are in the dark about whether the new stock would be taxable. The committee asked Icahn to provide his analysis of the tax question.

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