Inside Dell: Merger Proxy Will Show Business in Free Fall

The leveraged buyout of Dell requires that only 42 percent of existing shareholders vote against the deal for it to be abandoned.

Given the present opposition it faces from large shareholders—such as Southeastern Asset Management and Carl Icahn, who favor a leveraged recapitalization, or the many event driven investors who may simply be betting on a raised offer and have bought stock above the deal price—it is fair to say the LBO is in doubt.

But what isn't in doubt is that Dell is in the midst of a painful transition of its business model that few companies in technology have managed to navigate with success. It is that transition and the uncertainty of its financial results which is likely to be made plain when the merger proxy on the deal is released the last week in March.

(Read More: Carl Icahn Takes Up to a 6% Stake in Dell: Sources)

While many shareholders said they would rather Dell repatriate cash and add debt to its balance sheet for their benefit rather than the perceived benefit of its purchasers -- Michael Dell and the private equity firm Silver Lake -- there is plenty to come in this battle. The vote on the deal likely won't take place until mid-July and between now and then Dell will report another quarter of earnings.

First up though is the voluminous federal filing that will detail many of the actions and much of the thinking of the four person special committee of Dell's directors that led its negotiations with Michael Dell and Silver Lake and agreed to the $13.65 a share deal.

People with knowledge of that merger proxy note it will clearly show, not just the blow by blow of the deal making, but the extreme challenge and unpredictability that Dell is dealing with as its personal computer business faces increased competition from tablets and smartphones and PC makers such as Lenovo, who happily operate on margins of as little as 2 percent.

That volatility is best encapsulated by one detail expected to be in the proxy. In July, the management plan presented to the board called for operating income of $5.6 billion in the current fiscal year 2014. Now, sources say the oft-revised forecast, which most recently called for $3.7 billion, may be revised significantly below that.

(Read More: Dell Panel: Sale Best Alternative for Shareholders)

While Dell has spent over $13 billion on acquisitions over the last five years designed to move it away from reliance on PC's, they still represent roughly 66 percent of the company's $56.9 billion in revenues. Sources familiar with the situation say the proxy will cite the July plan as evidence of how fast things have changed.

That three year plan, presented by management prior to Michael Dell's engagement on a potential deal, was a bottoms-up view of the business and its prospects that predicted an increase in revenues and margins in fiscal year 2013—ended this January—and beyond.

Only three weeks later, that three year plan proved far too ambitious when Dell badly missed revenue and earnings per share guidance for its second quarter. It wasn't long after that, after discussing the idea with his neighbor in Hawaii, George Roberts of KKR, that Michael Dell approached the company about the possibility of a management led buyout.

A special committee of directors was formed to negotiate with Dell and one of its first acts was to try to get a handle on what the company was really worth. A new financial and strategic forecast was provided by a small number of finance officials in September. But as Dell's performance continued to deteriorate through the fall, even that plan, which called for far lower margins and revenues than the July plan, but still forecast $4.2 billion in fiscal year 2014 operating income, seemed optimistic.

People familiar with the matter say the Special Committee then made the unusual choice of turning to the consulting firm of BCG to help it understand the future of the PC business and the prospects for Dell to successfully transform itself. BCG eventually gave the Special Committee an appraisal that assumed Dell, even with margin improvement and cost savings, would not generate operating income above $4 billion for years to come, and would post roughly $3.4 billion in operating income this fiscal year—a number that now looks optimistic.

(Read More: Dell in Talks to Go Private, Shares Surge)

As for the process itself, according to people familiar with the matter, while Silver lake and KKR were the first private equity firms to discuss a deal with Michael Dell, who began this process on August 16, the idea of an LBO was first proposed to him by Southeastern Asset Management last June.

While KKR initially bid between $12 and $13 a share, when first indications were received in late October, it dropped out by early December without a follow up bid. Silver Lake meanwhile started as low as $11.22 a share before slowly working its way up to the $13.65 deal price.

None of this is to say the Dell deal will get done at that price if at all. Shareholders are likely to read things in the proxy that justify their perspective. And perhaps the greatest single impediment to the deal is the market itself. As shares of another troubled computer maker Hewlett Packard have soared this year and its multiple along with it, investors have gained confidence that Dell is simply worth more.

Still, the actions of a special committee trying to navigate not just a typically conflict ridden process, but a business that continues to change very quickly, and not for the better, should provide for insight into a deal battle for the ages.

By CNBC's David Faber; Follow him on Twitter @DavidFaber