Michael Dell’s showdown with nemesis Carl Icahn can be traced back to EMC deal

Carl Icahn (above) last tangled with Michael Dell in 2013, when Dell took his namesake company private.Victor J. Blue/Bloomberg News/File 2015

Michael Dell’s old nemesis Carl Icahn is back — and this time he’s armed with a copy of Machiavelli’s “The Prince.”

Icahn’s agitation comes at a bad time for Dell and his computer company’s backers at private equity firm Silver Lake Partners. Dell Technologies wants to buy out holders of the tracking stock of VMware, a separate public company Dell controls through its 2016 acquisition of Hopkinton tech giant EMC. (EMC had a majority stake in VMware.) Icahn argues in a letter filed on Monday that Dell’s proposal, valued at $21.7 billion in July, woefully undervalues the tracking shares. The legendary activist investor has amassed a sizable pile for himself — 16.5 million shares, or 8.3 percent — mostly in the last two months.

Securities and Exchange Commission filings tend to be dry, boring affairs — even the ones filed by activist shareholders who are going for a chief executive’s jugular. Not this one.

Icahn wants to stoke a rebellion. It’s better to have peace than war, he writes, but he enjoys a good fight for the right reasons — in this case, thwarting Dell. He namechecks Machiavelli twice, saying Dell and Silver Lake are following the writer’s advice that it is better to be respected than loved, but better still to be feared than respected.

The VMware tracking stock (DVMT) is an unusual creation born out of the Dell-EMC deal. VMware was considered the crown jewel of the EMC empire at the time. The tracking stock helped Dell sell the deal: It was a vehicle to allow EMC shareholders to continue to benefit from VMware’s success.

But the tracking stock largely turned out to be a bust, with shares trading significantly below VMware’s, which are still separately bought and sold by investors. Institutional Shareholder Services Inc. reported on Oct. 5 that the Dell offer, at the time, would crystalize a nearly 30 percent discount. (VMware’s closing price Tuesday: $148; DVMT’s, $96.)

Dell officials aren’t budging yet. They stood by their offer today; they say it represents a 29 percent premium over the tracking stock’s price before the new deal’s announcement.

The purported goal is to simplify Dell’s capital structure and to give it a new publicly traded stock that would be more attractive to investors and make it easier to enter merger and acquisition negotiations.

They also insist they don’t need the increased access to the stock market to pay off the massive amount of debt from the original EMC purchase. The company says its “core debt” has dropped to $36.5 billion, compared to nearly $49 billion at the time of the deal’s closure.

Dell will need to win a shareholder vote, likely later this year, to pull this off.

That means facing off against Icahn, who last tangled with Dell when he took his company private in 2013. Dell may need to significantly increase the offer to persuade Icahn to relent. Icahn ends his letter by saying he “does not see peace arriving quickly!” He may have lost his earlier fight with Dell, but he seems as determined as ever to win this one.