Dell– Not so sweet

There is no upside in Dell without risk.

• The “go-shop” period has produced two additional bids, but investors are going to be disappointed with the prices that have been offered.
• At the 12^th hour, both Carl Icahn and Blackstone have put in bids of $15 per share and “more than $14.25” respectively.
• These bids are some 10% ahead of what Michael Dell and Blackstone have offered but critically they are substantially below the “$15-$17” that many investors seem to have convinced themselves the shares are worth.
• The fact that both stalking horses have (in the market’s eyes) bid low is ringing vindication to the view that there is no real upside without a lot of risk being taken.
• Dell is at a strategic crossroads and in its current form will simply bumble along, losing market share and revenues gradually over time.
• When one looks at a market based and DCF based valuation of this scenario, $13.65 is not an unfair price especially when compared to the likes of HPQ and Apple.
• To get more than that, something radical needs to be done involving risks, which the market is clearly not prepared to take.
• Dell has two options.
  • First, to invest in R&D in order to properly address the changes that have come over the PC market.
  • Second, sell off the PC business and use the proceeds to pay down the debt raised from the deal leaving the owners with the software and services business.
• However, Michael Dell seems to be making noises about abandoning PCs and moving into tablets.
• Without more details, I can’t really comment, but from a high level this looks like it has disaster written all over it.
• The net result of these bids is likely to be a longer sale process, meaning more time for Samsung and Asustek to steal market share with their superior designs.
• At the end of the day, the price looks like it will be around $15 or 8.7x 2013 PER which compared to HPQ on 5.7x 2013 PER looks to me like a good deal.
• If the deal were to fall through, I think that Dell’s valuation would rapidly return to that of its erstwhile peer HPQ.
• Hence shareholders are already being offered some upside from a turnaround without having to take the risk of it all going horribly wrong.
• Shareholders should stop making a fuss and let those who are prepared to take some risk to turn this company around get on with it.