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Who Wins and Who Loses If Dell Is Taken Private

January 17, 2013 | About:

Holly LaFon

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Dell Inc. (DELL) is a hotly contested stock, with investors volleying back and forth whether it is a value or a value trap. If, as rumored, a private equity firm takes the PC-maker private, neither side actually wins per se, though some Gurus will make out better than others. Mere rumor of a private-equity buyout has lunged Dell’s share price about 18% this week to $12.84 a share in afternoon trading. Private-equity buyout offers often occur when a stock is being undervalued by the market, a view in line with several Gurus who bought Dell at cut prices.

Bill Nygren wrote in his July 2012 Oakmark Fund Commentary:

“Today we are focused on the growth of Dell’s non-PC businesses, whereas investors are worried about declining sales of PCs, a division we don’t think we are even paying for. In each case, if we are right, the fundamentals will force investors to reevaluate their prejudices, and we will profit from the repricing of the stock.”

Mason Hawkins in a 2012 presentation commented:

“Summary: Of everything they own, they measure on the intrinsic value of the business, and on that front Dell (DELL) has blown away all expectations. They are organically growing in the 20s; bears are focusing on the metric they want to, that revenue growth is low. Southeastern does not care about that. Most relevant is that they are growing profits. They are not worried about it at this point. Dell has evolved from a PC business to becoming the IBM (IBM) for small and medium-sized businesses, domestically and globally. It sells for cheaper multiples than IBM and we believe it will outgrow IBM in the next decade. “

Several Gurus who found the company undervalued, however, bought too early. Dell’s stock plunged to under $10 per share at the end of December, before the surge to today’s $12.82. Wallace Weitz for instance paid on average $13.16 for a piece his shares since 2008, which he began buying before 2008.

Mason Hawkins may have a harder time profiting. The largest Guru holder of the company, his Southeastern Asset Management paid $14.83 per share on average since 2008 for his more than 130 million shares, or enormous 7.5% stake in the company. He also began building his holding before 2008.

Before 2008, Dell’s stock price soared into the $20s and $30s, meaning if the investors bought the majority of their positions at those prices, the private equity company’s buyout price will have to be that high or higher for them to make a profit. If it is lower, such investors could face permanent capital loss.

DELL data by GuruFocus.com

Prem Watsa’s situation is similar, but he bought the majority of his stake after 2008, though his average purchase price is still $14.30 per share. Recently, theFairfax Financial investor made another large investment in troubled technology company Research In Motion (RIMM), whose turnaround he is expecting to take time.

Gurus who bought into Dell more recently, when the price fell to near-decade lows, may have chosen the best timing. Michael Price for instance purchased a parcel of shares in the second and third quarter of 2012 for $13 per share on average.

Likewise, Brian Rogers bought 14 million shares at the same time for the same average price. Other Gurus who bought shares in the second and third quarter include Ray Dalio, Tom Gayner and Dodge & Cox.

Gurus who completely exited their positions in the stock of course have no chance of profiting if the purchase price is higher than theirs, but also no risk of permanent loss if it’s not. Notably, David Einhorn lost hope and money with Dell shortly after purchasing 14.1 million shares for an average of $15.35 in the fourth quarter of 2011.

In his second quarter 2012 letter he wrote:

“Dell (DELL) proved to be a disappointment. We had thought that the growth in the non-PC business would be enough to offset the deterioration in the PC business. The non-PC growth was smaller than we'd hoped and the PC deterioration was worse than we'd anticipated. While DELL has a good balance sheet, it appears likely that management will try to use much of the cash to try to buy its way into better businesses. At a minimum, this will erode some of the value cushion that the cash balance creates. We exited with a loss.”

Though Dell grew its top line at a rate of 10.6% annually for the past ten years, weaker PC sales are hobbling business. In its fiscal third quarter 2013, the company reported an 11% year-over-year drop in revenue to $13.7 billion, on slower desktop and mobility sales.

To offset the trend, Dell has been shifting its business to more service and storage offerings and making acquisitions. It bought Quest Software and two other companies in the past several quarters.

There is no word yet on whether a deal will officially take place. Private-equity investor and Guru Wilbur Ross told CNBC on Tuesday that the buyout had a “50-50 chance” of taking place.

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