After days of discussions, Blackstone Group LP and Dell Inc.’s Michael Dell have yet to tackle a critical issue, according to a person with knowledge of the matter: what role he would play if the private-equity firm wins the bidding for the computer maker.

Michael Dell, the company’s founder, chief executive officer and largest shareholder, began talks with Blackstone after the world’s largest buyout firm submitted a proposal on March 22 to buy the Round Rock, Texas-based company. At stake is Blackstone’s effort to top the $24.4 billion leveraged-buyout offer led by Michael Dell and backed by Silver Lake Management LLC that a special committee of Dell’s board endorsed on Feb. 5.

Blackstone would prefer to win Michael Dell’s support for a counterbid in which he would invest some portion of the $4.5 billion he agreed to inject into the Silver Lake buyout, said the person, who asked not to be identified because the talks are private. To do so, the New York-based firm will have to reach agreement on the CEO’s future role and other fundamental issues such as his ownership stake and Dell’s strategic direction.

If Michael Dell doesn’t get a deal he likes from a victorious Blackstone, he will cash out his 15.6 percent stake and walk away from the company he started 29 years ago while in college, a second person said.

Christine Anderson, a spokeswoman for Blackstone, and Dell (Nasdaq: DELL) spokesman David Frink didn’t immediately respond to messages seeking comment.

Daily Talks

Michael Dell has met several times with Chinh Chu and David Johnson, the Blackstone executives overseeing the firm’s bid, in Texas, and the three speak daily, the two people said. Johnson joined Blackstone in January from Dell, where he led mergers and acquisitions for almost four years.

The talks have focused on charting a strategic plan for Dell that Michael Dell and Blackstone can both embrace, said one of the people.
Other issues will be decided later, this person said, with due diligence — Blackstone’s scrutiny of Dell’s internal financial statements and documents — expected to take four or more weeks. Its analysis of Dell’s books will begin April 8. Carl Icahn, a billionaire investor who also made a counterbid to Silver Lake’s offer, plans to proceed with due diligence, a person familiar with his thinking said.

Potential Roadblocks

Blackstone and Icahn submitted the only proposals under the go-shop period set up by Dell’s board to solicit competing offers.
A range of issues potentially stand in the way of Michael Dell collaborating with Blackstone.

Dell, 48, expects to wield operating control of the company after a buyout and would insist on remaining CEO, one of the people said. He also would object to Blackstone making wholesale changes to the executive team that he assembled. He is more flexible concerning Dell’s business strategy, the person said.

For now Blackstone isn’t contemplating a radical operational overhaul of Dell and would keep the company largely intact, said the person familiar with Blackstone’s thinking. It would aim to keep Dell’s personal computer business because of its distribution network and strong brand. Blackstone also believes that Dell’s enterprise software and server business, in which it sees strong growth potential, would benefit from the linkage to PCs, the person said.

Blackstone hasn’t made any decision on whether to sell Dell’s finance arm, the person said. General Electric Co. and other parties have expressed interest in buying the unit, which provides financing for less than 20 percent of the computers Dell sells, the person said.

Control Question

Blackstone doesn’t need to sell the unit to help fund the Dell buyout, and there is a chance that it will hang on to it, the person said.

The Silver Lake bid would make Michael Dell the majority owner, with the buyout firm having a smaller ownership stake and giving Michael Dell a freer reign over Dell’s strategy than Blackstone would probably support, a third person with knowledge of the discussions said.

Blackstone has offered to pay at least $14.25 a share to current investors with an option to hold onto some of their stake through a so-called equity stub. The Dell-Silver Lake deal would be a straight all-cash buyout of the shares Michael Dell doesn’t own at $13.65 a share. Dell closed yesterday at $14.26 in New York.

A Blackstone bid would likely prevent Michael Dell from being a majority owner and put more restrictions on his ability to run the company than he would with Silver Lake, according to this person.

Two Options

Blackstone is weighing two alternate deal structures, said the person with knowledge of the firm’s plans. One of them would probably give Michael Dell more than a 50 percent stake if he rolls over all of his shares, this person said. In the other, Dell would be a minority holder.

If Dell opts out, Blackstone is confident it can arrange debt and equity financing to get a deal done without him, the person said. Banks are indicating there’s more debt available than would be needed to finance the deal. Existing shareholders such as Icahn, T. Rowe Price Group Inc. and Southeastern Asset Management Inc. may stay invested.

If those three shareholders roll in their holdings, it would largely fill the equity financing gap Dell’s absence would create, according to the person. Southeastern expressed interest to Blackstone in participating in its deal, according to the person.

In its proposal, Blackstone said it was working with Francisco Partners and Insight Venture Partners, two much smaller private equity firms. They would each invest several hundred million dollars into the deal, the person said.

Jed Repko, a spokesman for Southeastern at Joele Frank Wilkinson Brimmer & Katcher, declined to comment. Executives at Insight Venture and Francisco Partners couldn’t immediately be reached for comment.