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A $25 Million Question Over a Bid for Dell

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Is Stephen Schwarzman's Blackstone Group really bidding for Dell? Or is it part of a bizarre, high-stakes charade?

That's the question left lingering in the air in the wake of Dell's 274-page proxy filing made late last week with the Securities and Exchange Commission about the continuing battle for the company.

Mr. Schwarzman's firm submitted a letter two weeks ago asserting that it planned to pursue a formal bid for Dell worth at least $14.25 a share, more than the $13.65 offer that Dell's board had already agreed to accept from Michael Dell, the company's founder, and Silver Lake Partners.

(Read More: Michael Dell Takes His Buyout Case to Employees)

To avoid the appearance of a conflict of interest given Mr. Dell's insider status, the company's board was given 45 days to continue to shop the company in hopes of finding a better offer. And, indeed, the appearance of a conflict of interest for Mr. Dell has become the running narrative. The cover of Barron's over the weekend featured a cartoon of Mr. Dell running away with a laptop under his arm, suggesting he was trying to steal the company, with the headline: "Not So Fast, Michael."

But over the last 45 days, virtually no competing bidders emerged, suggesting perhaps that nobody thought Dell was such a steal after all. It wasn't for lack of trying. Evercore Partners, the investment bank, was offered an incentive payment of $30 million if it could complete a deal for Dell at a higher price. According to Dell's proxy, Evercore contacted "67 parties, including 19 strategic parties, 18 financial sponsors, and 30 other parties."

Most were not interested. And then Blackstone arrived.

What did Mr. Schwarzman see that all of the other prospective bidders must have missed? That remains a mystery.

But what Mr. Schwarzman did next, thanks to Dell's disclosure, may go a long way toward explaining what's truly going on: Blackstone told Dell that it would not even consider bidding for the company unless Dell offered to pay the firm's expenses, up to a whopping $25 million.

(Read More: Dell Warns of Risks of Remaining a Public Company)

Yes, you read that correctly. Blackstone demanded that Dell pay it to go through the motions of bidding.

Here it is in the proxy: "The Blackstone consortium informed the special committee that it was not willing to proceed with its evaluation of the transaction contemplated" unless "it received an agreement from the company to reimburse the Blackstone consortium's out-of-pocket expenses in connection with its evaluation of a possible transaction."

Here's what's not in the proxy: Originally, Blackstone did not demand to be reimbursed for just out-of-pocket expenses — for consultants, travel and the like — but also sought to be able to receive payments for the time of its own executives, according to people involved in the process. Just think about it: How much would Mr. Schwarzman bill for his time? $10,000 an hour?

Ultimately, Dell's special committee agreed to pay Blackstone's out-of-pocket expenses, but not hourly fees or contingency fees for its banking advisers. (By the way, the special committee also agreed to pay Silver Lake the same reimbursement to make the process fair.)

(Watch: Cramer: My Advice to Michael Dell)

The fact that Blackstone refused to bid unless its costs were covered by Dell—a highly unusual maneuver—just goes to show you how little confidence it has that it expects to submit a winning bid for Dell.

Blackstone also required Dell to indemnify the firm from any lawsuits stemming from its involvement in the auction process, according to Dell's documents.

For Dell's special committee, agreeing to these bold demands from Blackstone is probably good business. If the board can keep a second bidder at the table, even if the suitor never makes a firm bid, Dell's special committee will have insulated itself from criticism that it did not run a competitive process.

The real question is why, despite the $25 million reimbursement guarantee, Blackstone is risking its reputation to even contemplate a deal for Dell.

If Blackstone makes a formal bid—and so far it has not lined up financing—it will most likely be competing against a bid from Mr. Dell. While Blackstone has clearly been invited into the auction process, if Mr. Dell quits or is ousted as a result of a winning bid from Blackstone, the firm will appear to have made a hostile bid. Private-equity firms have spent the last 25 years avoiding anything that could make them perceived as hostile because they typically want management teams to want to do business with them.

Last week, two Blackstone partners, Chinh Chu and David Johnson, who recently defected from Dell, met with Mr. Dell at his home. Mr. Dell is said to be open to working with Blackstone if they can agree on strategy, operations and corporate governance.

But by the looks of it, Blackstone and Mr. Dell are coming to the table from entirely different angles. Mr. Dell wants to keep the company intact and reinvest in developing the personal computer, tablet and emerging-market business. Blackstone's strategy appears to center on selling Dell's financing arm—it received some interest from GE Capital—and focusing on its services business.

What happens if Mr. Dell comes out with the following statement? "Unfortunately, after holding talks with Blackstone in good faith, I can't participate in their transaction because of a disagreement over strategy. Their plan is a short-term and shortsighted effort to break up the company and put in peril Dell's more than 100,000 employees."

All of sudden, Blackstone would look like a barbarian at the gate in a big and very public nasty battle. (Some would claim Mr. Dell was being selfish, but the damage would be done—to Blackstone.)

Alternatively, is it really possible Blackstone would try to embrace Mr. Dell and make him the chief executive — which they have said they are open to doing? Blackstone has already been canvassing for other candidates. In fact, the firm contacted Mark Hurd of Oracle before ever even discussing the matter with Mr. Dell, which, of course, was a not-so-great way to ingratiate itself with a potential future partner.

And then there's the ownership stakes. Mr. Dell owns about 15 percent of the equity in Dell. It is almost impossible to believe that Blackstone would put in more equity than Mr. Dell already has in the company. That would leave Blackstone as a smaller equity owner than Mr. Dell himself. Would Blackstone really team up with him and let him have control of the company?

All of these questions have no good answers. But for $25 million in reimbursed expenses, maybe they don't need them.

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