ISS says renegotiating Dell tracking stock offer would be best option

Shareholder advisory firm Institutional Shareholder Services Inc (ISS) said on Friday that Dell Technologies Inc should renegotiate an offer to acquire a tracking stock tied to is virtualization software subsidiary VMWare Inc.

Several hedge funds, including Elliott Management Corp and Canyon Capital Advisors LLC, as well as activist investor Carl Icahn, have resisted Dell’s $21.7 billion cash-and-stock offer for the tracking stock, arguing it undervalues it and inflates Dell’s value.

In the face of such opposition, Dell has said it has met with investment banks to explore an initial public offering (IPO) as an alternative transaction. Acquisition of the publicly traded tracking stock would also result in Dell going public, but without an IPO.

While ISS is reserving its final opinion on the tracking stock offer until Dell files its definitive proxy statement, it said in a note on Friday there were questions on whether the bid, which Dell valued at $109 per share when it announced it on July 2, was really worth that much and whether it represented a fair premium.

“A negotiated merger seems the cleaner path, albeit one contingent on reaching a valuation middle ground. Silent opposition from investors and a take-it-or-leave it approach by Dell won’t get anyone there,” ISS said.

Dell issued the tracking stock in 2016 to buy data storage company EMC Corp for $67 billion, because it could not pay for the whole deal in cash and did not want to add to its debt burden. EMC owned the majority stake in VMware, which Dell inherited.

Dell had considered an IPO earlier this year as part of a strategic review that also explored a possibility of a reverse merger with VMware. In July, it decided against the IPO because of concerns that its large debt pile would put off stock market investors, sources said at the time.

After a potential IPO, Dell could force owners of tracking stock to sell it. The premium would be between 20 and 10 percent, depending on the amount of time between Dell forcing them to sell it and the completion of the IPO, according to regulatory filings.

Whether tracking stock shareholders would be better off under that scenario, as opposed to selling to Dell now, would hinge on the performance of the IPO and the timing of a subsequent takeout.

ISS said the IPO alternative “seems suboptimal for both sides”, especially since resistance to Dell’s offer has been rooted more on valuation rather than structure.

Dell started an investor roadshow this week to persuade investors to accept the tracking stock deal.