Dell – Don’t be Greedy

Those holding out for $15 may be disappointed.

• The exit of Blackstone has little to do with PC forecasts and everything to do with a bidding war that was increasingly likely to end in disaster.
• I suspect that Blackstone realised that paying “more than $14.25” was effectively giving shareholders a far better return than they were entitled to given the risks involved.
• Dell is at a strategic dead end and in my calculations a fair price for that is around $12 per share.
• To see a higher price, substantial risks need to be taken to derive and implement a new strategy which could fail leaving Dell far worse off than it is today.
• Hence offering shareholders $14.25 or more a share is offering them a greater return than they are entitled to.
• This is because they are unwilling to take the risk of a strategic turnaround and if the deal was to fall through, I suspect the shares would be rapidly marked back to around $12.
• Hence, to me the Dell / Silverlake offer of $13.65 is a pretty good price for shareholders.
• The problem now is that I understand that even Silverlake is getting cold feet and it will cost it a fortune ($750m) to walk away.
• Greed and fear remain as alive today as they have ever been.
• However, I think that Silverlake is wrong to get cold feet. At $13.65 a share there is a lot of money to be made if execution is solid as the PC market is far from dead.
• At that price, Silverlake and Michael Dell will need to raise around $19bn in debt to make the deal happen.
• I strongly believe that the plan is to split the company up and sell off the PC business.
• The idea here is that the valuations of the server, software and services business are being heavily polluted by the PC business.
• Get rid of the PC Business and Silverlake will find itself with a range of business with some growth potential that can now be properly valued.
• The key to this is that Silverlake and Dell must sell the PC business for $19bn or more.
• That way they can get rid of all the debt raised leaving them with a large stake in a growth business acquired at a low price.
• $19bn requires the PC business to sell at 0.7x EV/Sales, some 40% higher than HPQ which is on 0.5x EV/Sales.
• To get that 40%, the PC business will need to be turned around or at least put on a clear and credible strategic path.
• Here lies the risk, as Dell’s competitive edge as long since been eroded and very little has been done to find a new one.
• Despite the risk, Silverlake are pretty savvy bunch in my experience and I am pretty confident they can come with something innovative given a chance.
• However, Carl Ichan is still hovering in the wings and seems to be willing to pay $15 a share for a very substantial stake.
• Shareholders voting for Carl Ichan had better make sure it is their shares that he buys as I seriously doubt those left behind will ever see $15 again should he get in the driving seat.