In our last quarterly report, I commented about our Dell holding and our expectations that management’s offer to take the company private would be topped by a third party.
Quoting from that report:
“As I write this, two alternative acquisition proposals have been presented to Dell’s board, and the committee is reviewing them. We expect them to conclude, as we have, that an offer superior to Silver Lake’s offer has now been presented. Once that happens, Silver Lake will have an opportunity to outbid the new offer. Though we are probably in the late innings of our Dell ownership, we don’t think the game is quite over yet.”On April 18, Blackstone, the potential bidder in which we had the most confidence, announced it was withdrawing from the process and would not submit a formal offer to purchase Dell. That changed our thesis for owning Dell.
We believed Blackstone had an information advantage compared to other potential bidders because the former head of Dell’s mergers and acquisitions team works at Blackstone. Our confidence in Dell’s value was based on the large amount of capital that the company had deployed for acquisitions outside its legacy PC business. Dell management had many times spoken positively about how well the acquisitions – arguably now comprising the majority of the company’s value – had performed relative to its expectations.
So we were surprised and disappointed when, after extensive due diligence of non-public information, Blackstone said that it was alarmed by Dell’s rapidly deteriorating financial situation. Bloomberg reported that Blackstone concluded that the enterprise-solution business (largely the acquisitions) “was years away from competing meaningfully in that market.”
At Oakmark, we have always paid extra attention to the actions of investors who have access to information public investors don’t have. We monitor the buys and sells of corporate insiders. We use the summary statistics from acquisitions of entire businesses to inform our valuations of similar public companies. And on several occasions we have sold our holdings after a company conducted a strategic review of operations that did not result in sale of the company.
Our numbers suggested Dell should be worth a premium to the $13.65 offer from management, but then a potential acquirer with access to non-public information decided to end its quest to acquire Dell at a higher price. Since they had information we didn’t, we believed it was prudent to assume they might be right. So we sold our stock and will put the proceeds into other stocks that we are more confident are undervalued.
William C. Nygren, CFA
As of 3/31/13, Dell, Inc. represented 2.1%, of the Oakmark Fund's total net assets, 4.5% of the Oakmark Select Fund’s total net assets and 4.2% of the Oakmark Global Select Fund’s total net assets. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
The Oakmark Fund’s portfolio tends to be invested in a relatively small number of stocks. As a result, the appreciation or depreciation of any one security held by the Fund will have a greater impact on the Fund’s net asset value than it would if the Fund invested in a larger number of securities. Although that strategy has the potential to generate attractive returns over time, it also increases the Fund’s volatility.
Because the Oakmark Select and Oakmark Global Select Funds are non-diversified, the performance of each holding will have a greater impact on the Funds’ total return, and may make the Funds’ returns more volatile than a more diversified fund.
Investing in foreign securities presents risks that in some ways may be greater than U.S. investments. Those risks include: currency fluctuation; different regulation, accounting standards, trading practices and levels of available information; generally higher transaction costs; and political risks.
Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods.
The discussion of the Fund’s investments and investment strategy (including current investment themes, the portfolio managers' research and investment process, and portfolio characteristics) represents the Fund’s investments and the views of the portfolio managers and Harris Associates L.P., the Fund’s investment adviser, at the time of this letter, and are subject to change without notice.