Dell – Game of Chicken.

Shareholders are playing a dangerous game in trying to force a higher price.

• Today is the day when shareholders must vote on the offer made by Michael Dell and Silverlake to acquire the company for $13.65 a share.
• To succeed the deal must win the approval of more than 50% of all shareholders excluding the shares of Michael Dell (16%).
• In effect, the deal must win 60% of all the remaining shares in order to pass.
• If I count up the shareholders who have publically stated that they will vote against I come to a total of 30% meaning that the vote is likely to be very close.
• This is a very dangerous game for investors to play and has all the classic market hallmarks: greed and fear. (see here).
• I believe that Silverlake and Dell’s interest in the company is to realise the value of the software and services piece that is currently being polluted by the PC business.
• To achieve this they need to sell the PC business for around $17bn and use the proceeds to pay down the debt they raised in order to buy the company.
• The risk of this strategy is that it will not be easy to sell the PC business and there is no guarantee that they will achieve a price of $17bn especially in this environment.
• Without a deal, Dell remains at a strategic dead end and whatever strategy is chosen to turn the company around will involve substantial risk.
• If I assume that Dell does nothing and remains the way it is, I would value it in line with Hewlett Packard (Mean 7.3x 2013/2014 PER).
• This gives me a valuation of around $9.1 per share some 30% below where the shares stand today.
• If the deal fails, then the chances are that the company will continue to dither and flounder and no real strategy for recovery will be put in place.
• I would expect the shares to return to trading in line with Hewlett Packard.
• In this instance, Hewlett Packard makes a much better investment.
• This is because although it too has no real strategy, it does not carry the risk of losing 30% of its value.
• I believe that $13.65 is a fair price for investors as the alternative is to see 30% of one’s value rapidly erode as Dell returns to its fair value.
• The upside in Dell is just 6% if the deal should pass but 30% downside if it should fail.
• There is a reason why Dell and Sell rhymes.