It is not unusual for ISS to endorse a large take-private transaction, but there were strong indications last week that the shareholder advisory firm viewed the deal negatively. In fact, Dell’s special committee was so concerned that it suggested Michael Dell and Silver Lake increase their offer (something to pair chose not to do).

The reason ISS matters so much here is that certain Dell shareholders may rely upon it as an unbiased judge in what has become a case of dueling narratives between Michael Dell and Carl Icahn, Dell’s largest outside shareholder and vocal critic of the proposed transaction.

In short, Michael Dell has told shareholders that his eponymous company will continue to struggle as a publicly-traded entity, and that he would like to assume most future risk (and possible reward). Carl Icahn argues that Michael Dell is trying to “steal” his own company, which isn’t in nearly the dire straights that its founder would have shareholders believe.

ISS seems to have sided with the former argument, pointing out secular PC market declines and the fact that Dell had been trading more than 41% below the proposed buyout price before a Goldman Sachs (GS) analyst suggested the company may be an LBO target (and a 25% premium to when Bloomberg first reported private equity interest). It also points out that while Carl Icahn has left the impression that shareholders are voting between the buyout and an Icahn-led tender/recap plan, this is not really true:

“From a public company shareholder’s perspective, if your C.E.O. is willing to buy your falling knife for the privilege of catching it, there is probably a price at which you should let him… The alternative to accepting the buyout offer is to continue holding equity in a publicly-traded Dell, with continued exposure to the risks and rewards of ownership. The Icahn / SAM leveraged recapitalization proposal – in providing a liquidity option for shareholders who wish to cash out now, and increased exposure to the success or failure of the business transformation for those who do not – is only one vision of what that alternative, still publicly-traded future Dell might look like. Because shareholders cannot immediately accept $14 in cash even if they vote down the proposed buyout, however – they must also vote to replace the entire board and the CEO through a proxy contest at a subsequent annual meeting, and even then may end up with cash and equity if the envisioned self-tender is oversubscribed – the choice remains whether $13.65 in cash now is a better alternative than continuing to hold equity in a publicly-traded Dell…

ISS concludes:

In the end, shareholders must weigh the bullish enthusiasm of Icahn, SAM, and several other shareholders who have publicly declared the offer price too low against the apparently increasing headwinds in Dell’s transformation process, and the signals transmitted by the lower trading prices and analyst price targets immediately prior to any takeover speculation. Given the 25.5% premium to the unaffected share price, the certainty of value provided by the all-cash consideration, and the fact that the transaction would transfer to the buyout group the risk of the deteriorating PC business and the company’s on-going business transformation, a vote FOR the transaction is warranted.”

Shareholders are expected to vote on the proposed buyout next Thursday.

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