Guru Dell shareholders’ chances of getting a price higher than the original $13.65 per share pitched by CEO Michael Dell and private equity firm Silver Lake Partners in February dwindled on Friday when a second bidder, Blackstone Group (NYSE:BX), withdrew an offer of $14.25 per share for the company.
Major shareholders value the company quite differently. “I don’t think a leveraged buyout would get much support at $15 per share,” Richard Pzena, CEO of Pzena Investment Management speculated in Barrons back in January. He estimated Dell shares are worth as high as $25 per share, and said he would consider supporting an LBO at $20 per share, calling anything lower “insiders trying to steal the company.”
Carl Icahn saw far greater value in the company than Michael Dell’s asking price as well. He offered to buy 58% of outstanding shares for $15 each. And Mason Hawkins’ Southeastern Asset Management believes a more accurate value is around $24 per share, according to a letter from March.
Their more positive analyses of the company compelled them to buy at higher prices, and only a higher price would help them break even on their holdings. Mason Hawkins, who owns 8.39% of Dell’s outstanding shares, purchased the majority of the position before the second quarter of 2008, when the price ranged from around $20 to over $40 after 2000.
Far from seeing a buyout in Dell’s future, Hawkins saw it fixing its declining PC-sales woes by transitioning to other businesses, in the style of IBM (NYSE:IBM), engendering vast sizable growth prospects. “Of everything they own, they measure on intrinsic value of the business, and on that front Dell (DELL) has blown away all expectations,” he said on a management call in May 2012. “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 for small and medium-sized businesses, domestically and globally. It sells for cheaper multiples than IBM and I believe it will outgrow IBM in the next decade.
Similarly, Richard Pzena, holder of a 0.73% stake in the company, would only break even or receive a marginal profit at the proposed LBO price. He paid $12.14 per share on average for the shares he began purchasing in the latter half of 2008, when Dell’s price plunged to as low as around $11, from a high of over $25 earlier in the year.
Pzena also sees the company’s prospects as bright. “The price of the deal is unreasonable. Based on Dell’s own internal projections the price of the deal should be in the $20s,” he told CNBC in February. “It’s hard to understand what they can do as a private company that they can’t do as a public company.”
But while often value-oriented managers such as Pzena and Hawkins see a temporary lag in an otherwise strong company’s operations as a discount buying opportunity, others may see it as a failing company. When Blackstone dropped its bid for the company, it cited as reasons “an unprecedented 14 percent market decline in PC volume in the first quarter of 2013, its steepest drop in history,” noting that it was “inconsistent with management’s projections for modest industry growth.”
The first quarter result marked a steeper change than the weakness reported in recent years. In its fiscal 2013 results, Dell reported an 8% overall decline in revenue, due largely to “increased competition from alternative mobile devices,” it said in its 10-K, as it “is currently undergoing a strategic transformation to an end-to-end technology solutions provider.” Product revenue declined 10%, while services revenue including software, which it was counting on to offset PC sales declines, failed to grow at all from the previous year. From fiscal 2012 to fiscal 2011, product revenue was unchanged, while services revenue grew 6%. Revenue at its services segment increased 1%, which when broken down reflected its slow transition.
“Although we experienced declines in unit sales from our client products during Fiscal 2013, we are enhancing our focus on value-added attached services. The increase in revenue from support and deployment services was largely offset by an 11% decrease in applications and business process services, which was driven by select contract expirations, as we continue to migrate to contracts that provide higher-value opportunities,” the company said in its 10-K.
Dell’s small and medium business segment services revenue which Mason Hawkins pointed to, however, saw a 22% year-over-year increase in revenue in fiscal year 2013.
Going back further, Dell’s third quarter of fiscal 2013 revenue declined 8% year over year, as services revenue declined 1%.
David Einhorn exited his Dell position when he did not see growth in the non-PC business materializing enough to offset declining PC sales, he said his shareholder letter in July 2012.
With the company turning down Carl Icahn’s $15-per-share offer for a controlling stake in the company, the prospects for large Dell shareholders to receiving the price they think they deserve have dimmed. Dell on April 16 formed an agreement with Icahn preventing him from purchasing more than a 10% stake in the company, or to partner with any shareholders which together would cause them to own more than 15% of outstanding shares. Icahn currently has a 6% stake in the company.
Donald Yacktman, who owns 14.9 million Dell shares, is still optimistic a deal better than Michael Dell and Silverlake’s could emerge. “It’s still fluid,” he told the Wall Street Journal on April 19.
The market appeared less hopeful, as Dell shares dropped below the bid price on April 19, the day Blackstone pulled out, for the first time since the second week of February. Shares have remained there, closing at $13.24 on Monday, down 1.19%. They are up 30.57% year to date after jumping on news of a possible leveraged buyout.
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