Dell Technologies IPO Would Be ‘Suboptimal’ Route, ISS Says

(Bloomberg) -- A prominent shareholder advisory firm -- weighing in on Michael Dell’s plans to take Dell Technologies Inc. public -- argued that a traditional initial public offering isn’t the best path forward.

The world’s largest private technology company is considering that option as an alternative to returning to the public markets via a $21.7 billion takeover of its tracking stock, DVMT. Dell Technologies should stick with the merger route, even as some investors push back against the deal, according to Institutional Shareholder Services Inc.

"In many ways, the IPO alternative seems suboptimal for both sides, especially given that opposition to Dell’s offer has seemingly been based on valuation, not structure," ISS said in a report published Friday. "From a governance perspective and arguably from a long-term value perspective—a negotiated merger seems the cleaner path, albeit one contingent on reaching a valuation middle ground."

A representative for Dell declined to comment.

ISS did not give a recommendation on whether DVMT holders should vote for for the proposal, noting that a definitive proxy hasn’t been filed. The advisory firm also hasn’t engaged the company yet.

The primary question investors are focused on is whether the valuation Dell has ascribed to its core shares is fair for holders in DVMT, which was designed to track Dell’s stake in VMWare Inc., ISS said.

Some investors have balked at the DVMT buyout, questioning how Dell arrived at a valuation they say is too high. The offer of $109 a share in cash and Dell Class C stock values Dell’s Class C shares at $79.77 -- a number that more than doubled during the company’s internal calculations in the months before the deal.

Dell Technologies has acknowledged the push back from investors in regulatory filings, ISS said. The advisory firm also noted that two prominent activist investors, Carl Icahn and Paul Singer’s Elliott Management Corp., hold positions in the tracking stock.

"Yet, no investor has emerged to spearhead a coalescence of opposition," ISS said. "Some of this silence may be a sign that investors are resigned to the idea that improved terms are unlikely and that the alternative could be worse; it could also be a pregnant pause suggesting that some investors believe the valuation is so far off that it does not yet merit a public response."

ISS said there are risks associated with the IPO, including the fact that DVMT holders could be forced to convert their shares at a lower premium. While this could translate into a higher discount, it could also result in DVMT holders owning a larger stake in the combined company. That’s because an IPO would force Dell to rely on a market-based valuation of its core business.

For DVMT holders, ISS said fair value likely falls somewhere between what "they were sold" when they bought the tracking stock and what they now hold -- one that trades at a 37 percent discount to the underlying stock.

"Silent opposition from investors and a take-it-or-leave it approach by Dell won’t get anyone there," ISS said, adding that it would continue to monitor the situation.

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