Icahn, in a letter made public by the company's board of directors, said the plan to take the company private in a $US24.4 billion ($A23.9 billion) buyout led by founder Michael Dell "is not in the best interests of Dell shareholders and substantially undervalues the company".
The investor known for moves on companies ranging from MGM to Yahoo! said that Dell, instead of going private, should make a special dividend payment to shareholders by using cash, assets or by borrowing.
This plan would give Dell shareholders 67 per cent more than the offer of $US13.65 per share.
"We see no reason that the future value of Dell should not accrue to ALL the existing Dell shareholders - not just Michael Dell," Icahn said in the letter.
He said if Dell allows the buyout to move ahead, "we anticipate years of litigation will follow challenging the transaction and the actions of those directors that participated in it".
He said there will be questions about potential conflict of interest because of relationships between Michael Dell and board members.
Dell's special board committee evaluating the options said it was "currently conducting a robust 'go-shop' process to determine if there are third parties interested in proposing alternative transactions", and would "welcome Carl Icahn and all other interested parties to participate in that process".
At least two major institutional shareholders have said they would vote against the plan.
Dell hosted a media event in Sydney last night to celebrate 20 years in Australia.
