GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Who Is Interested in Dell Going Private?

January 16, 2013 | About:
As probably most of those interested in Dell (DELL) already know, there is a possibility that it will go private. Supposing that is the case, it is worth thinking about who could be interested in this deal going through. For this reason I made a small list of the possible interested groups:

1) All the shareholders, institutional or retailers, who bought at low levels and want to get out relatively fast at a premium.

2) The private equity firms clearly are interested; that is the reason they are in talks to buy it.

3) The one whom few are talking about is the CEO and 16% owner: Michael Dell. Michael Dell could be considered one of the private equity partners, maybe even the bigger one. After all, he has more or less $15 billions of net worth. His net worth is as big as his company's market capitalization value just a few days back. He is one of the richest men on the planet ranking high on the Forbes list of billionaires. With only a fraction of his net worth he could put the whole equity part of the deal. With his big ownership not many votes would be needed to approve the deal. He also has investing experience via his MSD Capital hedge fund which has reportedly been quite successful.

Michael Dell, already a major owner, has been buying shares of his company in the last few years at even higher prices than now. As a billionaire and founder, if he decides to put equity into the deal he could end up owning north of 40% of the shares of the private company, maybe even more. Once private the dividend could be cut in order to pay the bank and the bond holders. That could cover a substantial part of the interests. Specially if the deal is done at low interest rates. Not strange at all these days, thanks to the governments zero interest rates policy, where many junk bonds yield hardly above inflation. That said it might not be easy to pull off the deal at low prices due to the possibility of competitive offers or of lawsuits from shareholders against the board of directors.

If I represented Silver Lake or another of the undisclosed private equity partners, I might be interested in Michael Dell remaining to run the company. I do not think it is clearly advantageous to replace him as CEO.

Given that possibility, the ones that would not benefit are all those who invested at prices substantially higher than today. Considering the current low historical levels of the stock price, many could fall in that category.

The important fact to note is that as a shareholder with the intention to remain at his company or even increase his ownership, Michael Dell would be interested in taking his company private as cheaply as possible. In other words, in paying as little as possible for it. Therefore, his personal goal could be making the cheapest possible deal for the rest of the public shareholders. That would allow him to remain owner, with a much bigger ownership, and his fellow owner(s) would be some private equity firm(s), instead of institutional and retail public investors. He would have increased power and could execute freely without having to live under the pressure of being a public company.

The situation reminds me when Warren Buffett years ago bought Berkshire Hathaway (BRK.A)(BRK.B). The big difference then was that he warned investors not to sell if they did not want. They were explicitly told that he would buy their shares because he considered them to be cheap.

With a deal or not, this could be taken as a sign that the company is not shareholder friendly. It might not be doing its shareholders a favor by letting a deal go through at a cheap level. The bad consequences are also for employees who probably feel more insecure now. It could also explain why so many good high-level managers have left Dell lately.

Being a current shareholder, it is beneficial to do this kind of exercise to understand the incentives of the related parties. If Michael Dell is really interested in remaining in the company as CEO and equity owner, this could be an opportunity for him to buy back his company at a low price and remain on the helm. Under that scenario the one more interested in the private equity deal going through could be the current owner/CEO himself, and shareholders expecting to get high prices could be disappointed.

Disclosure: Long Dell (my portfolio)

About the author:

Jose Vasquez
I was born in Spain and lived in France, Chile, USA and Belgium. I used to work in IT and Banking. I am a family man, I have a lovely wife, 3 sons and one step daughter. I have humble tastes, I like to stay home and read about companies. I started investing before the internet bubble. I knew little and liked technical analysis so my results were bad. Fortunately I did not have much to lose. Some years later in 2006, bored of doing real state investments, I opened an interactive brokers account and restarted. This time, not wanting to make mistakes, I decided to follow a model: Warren Buffett, he was at good making money via stocks. So I started reading about him, his shareholders letters, the books that he recommended, etc... I started applying his principles, reading 10K's digesting all sources of information. I started buying good and cheap companies to hold forever unless something changed fundamentally. When the housing crisis started I was 75% cash. By then I had identified good companies at very cheap prices so I invested most of my savings in stocks. It doubled fast. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. I changed lifestyle and moved from Belgium to the beach, Brazil, north east coast (www.kuchita.com). The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return, to move away from the inhuman life of civilization and to have some peace and sunny weather. Now I can think and study about companies 60 hours/week. I can finally do what I want full time and can say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! My portfolio is disclosed here: http://www.kuchita.com/view/sumo.php For more:

Visit Jose Vasquez's Website


Rating: 4.0/5 (8 votes)

Comments

batbeer2
Batbeer2 premium member - 1 year ago
>> The important fact to note is that as a shareholder with the intention to remain at his company or even increase his ownership, Michael Dell would be interested in taking his company private as cheaply as possible.

Maybe, maybe not. It is equally likely he is looking to cash out at the highest possible price. In any case, if you yourself owned Dell outright, would you want Micheal Dell to run it for you? I'd say yes.

One advantage of following gurus is that it does offer some protection. Mason Hawkins, Francis Chou and Prem Watsa own more than 200m shares between them.

Taking the company under with those guys on board is going to be tough.
batbeer2
Batbeer2 premium member - 1 year ago
Come to think of it, who may be interested in Dell?

Amazon?

Staples? (I know it's smaller)

Both would probably love to integrate the retail side of Dell into their operations. After all, Dell is one of the largest and most profitable online retailers. A combination of Dell and Staples would be an interesting franchise IMHO.

On the software and services side, Oracle, Infosys, Accenture and even IBM might be interested.

There are many interesting deals possible but the market is currently focussed on the poorest outcome thinkable.

At the end of the day, we can agree Dell is still pretty cheap.
Jose Vasquez
Jose Vasquez - 1 year ago
Good points on Amazon, Staples, Oracle, IBM... as possible buyers. I did not think of that. Amazon could use their shares as currency to make a deal, they seem quite overvalued.

Yes I agree if Michael Dell wants to cash out then he would want to sell expensive.

On the other hand if he wants to remain in control and increase his holding he would want to buy at cheap prices.

Lou Simpson also has a few Dell shares. It is to expect that all those guru guys will defend their interests and will do whatever they can not to allow to be bought out cheaply. It is worth though noting that if those guys are offered to have ownership in the private company then they will also want to buy the rest of the shareholders cheaply.

Cheers!

jrv
Jose Vasquez
Jose Vasquez - 1 year ago
Mason Hawkins, Prem Watsa and Lou Simpson, all bought at prices over 14, therefore they will not want to sell below that price. Unless they are invited to participate in the equity deal as owners of the private company and increase their ownership by putting additional equity and getting new shares. Then as value investors who want to buy cheap, if they accept, they will want to buy out others at the lowest possible price.

Anything can happen, its good though to know the possibilities.
Jose Vasquez
Jose Vasquez - 1 year ago
Good points taken from here: _http://blogs.barrons.com/techtraderdaily/2013/01/18/dell-deal-can-get-done-says-bernstein-southeastern-potential-obstacle/

As it happens, founder and CEO Michael Dell will have to recuse himself at some point, as the board of directors mulls any eventual bid, and “He would also, ironically, be at odds with shareholders and the special committee – his incentive will be to argue that the business is worth less and is riskier than investors may believe, while shareholders and the special committee will seek to ensure that they are getting the best possible price.”.......

Sacconaghi thinks a deal can get done, and probably at “around $14 to $14.50 per share,” though he notes that there is the risk of opposition if a large shareholder agitates for a higher price:

We believe that a deal for Dell is likely to be approved by shareholders. We did some simple math: Michael Dell has roughly 16% of the votes and will vote affirmatively; merger arbs hold an estimated 10% of the stock (total Dell shares traded since the deal was announced has been 22% of shares outstanding, of which a good portion of the purchasing is likely by arbitrage/event-driven firms) and will vote for the deal; passive investors account for 8% of shares and will vote affirmatively; many firms will defer to ISS to cast their vote (perhaps 20%+), who will very likely vote for the deal. Additionally, we note that of the next 25 largest shareholders after Michael Dell own 42% of the shares, and we estimate that ~60% of those have average acquisition costs of $15/share or less or are passive, suggesting some among them may support the deal. Net net, we believe that if a deal goes to a shareholder vote it will likely be approved, unless… The biggest risk to the deal is that an existing (or new) shareholder becomes an activist, arguing for a higher price […] We note that Dell’s largest shareholder (Southeastern Asset Management) has a 7.5% stake in the company, acquired at an estimated average price of over $20/share1. Southeastern has defended its position in Dell to its fund holders as recently as Q3 2012, arguing that it believes that fair value is ~ $20. Perhaps more importantly, Southeastern has a history of activism, most notably in De Beers/Anglo American (2001), Vulcan Materials/Martin Marietta (2012) and Chesapeake Energy (2012).

Jose Vasquez
Jose Vasquez - 1 year ago
More possible conflicts of interests:

Silver Lake is a known quantity to Dell or its top executives. Michael Dell was an early investor in their funds while board member Alex Mandl has also worked with the firm in the past.

Dell's software chief, John Swainson, who joined last March, was a senior advisor at Silver Lake.

Source: http://www.reuters.com/article/2013/01/18/us-dell-temasek-idUSBRE90G0OE20130118?source=email_rt_mc_body

Jose Vasquez
Jose Vasquez - 1 year ago
More interesting info:

"I don't think an LBO would get much support at $15 a share," says Richard Pzena, the founder and chief investment officer of Pzena Investment Management, which held 14 million Dell shares on Sept. 30. Pzena says his firm's analysis suggests Dell is worth $25 share. "We might think about supporting an LBO at $20, but at $15, we think an LBO would amount to insiders trying to steal the company because of current market conditions." Those conditions—notably weak earnings—drove Dell stock below $10 late last year and reflect decisions made by Michael Dell.

.....

Southeastern's stance likely will be critical, since it held a 7.5% stake on Sept. 30 (the most recent reporting date), second behind Michael Dell. If Southeastern backs the deal, it will be very tough to stop. Yet there's a good chance that Southeastern opposes an LBO because it stated in the third-quarter commentary for its Longleaf funds that Dell is worth at least $20 per share, and it has a history of activism. If Southeastern opposes the LBO, it likely would get support from existing holders.

From: http://online.barrons.com/article/SB50001424052748704843204578245642513078234.html?mod=BOL_hpp_mag#articleTabs_article%3D1
batbeer2
Batbeer2 premium member - 1 year ago
>>On the software and services side, Oracle, Infosys, Accenture and even IBM might be interested.

@#%mn.... I missed the opportunity to score some bragging rights. As it turns out, it's MSFT.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK