Bill Nygren Comments on Dell - Apr 23, 2013

The Dell (DELL) situation hasn’t been as straightforward. Dell has been -- and continues to be -- a sizable position in several of our Funds. In our annual report for the year ended September 2012, we wrote about Dell as one of our worst performing holdings for the year. Investors were frustrated that its personal computer business, its biggest revenue generator, was in decline. We owned Dell because of its non-PC businesses, which appear to generate most of its profits, and because we believed that, at its market price, we were getting paid to own the declining PC business.

In February, private equity firm Silver Lake and Dell CEO Michael Dell offered to purchase all outstanding shares for $13.65 per share. Though that price was a nice premium to the year-end share price of $10.14, many of Dell’s long-term investors, including us, thought the offer should have been higher. Several of our shareholders expressed concern that we didn’t complain vocally enough in the press, as some of our peers did. Just because we aren’t talking publicly doesn’t mean we aren’t talking.

First, by the time we decide to invest in a company, we have already concluded that management and the board are likely to act in our interest. If we conclude otherwise, we simply walk away and move on to the next candidate for investment. Once we own a stock and believe we have a point of view that should be of interest to management or the board, we are not shy about communicating with them. Sometimes they can show us why we are wrong, sometimes they adopt our point of view. Most of the time, these are very friendly discussions among professionals who share the same goal – maximizing the value of our investment.

Occasionally, and thankfully not too often, we have important disagreements with management or the board. If we conclude they are not trying to maximize value, we usually sell our stock and reinvest in a different undervalued company. Every once in a while, the undervaluation is too large to match in a new holding, so we end up in a public dispute with management. But our process is designed to minimize those situations.

In the case of Dell, we have shared our thoughts with the board, especially regarding the importance of conducting an open process so that all offers receive fair consideration. They completely agreed. So far, we are satisfied with how the special committee of directors is performing its task. We fully expect that it will seek out the best deal for its shareholders. Should that change, though we don’t expect it will, then and only then will you read what we’re concerned about in the press.

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.

From Bill Nygren's first quarter 2013 commentary.
Check out Bill Nygren latest stock trades

Wallace Weitz Comments on DELL - Apr 11, 2013

Michael Dell’s bid to take Dell (DELL) private sparked a sharp rise in Dell shares. The stock, which had languished in the $8-10 range last fall, rose above the $13.65 takeover bid price. The proposal met with a firestorm of resistance from some long-time holders, but as the required analysis shifted from long-term business fundamentals to merger arbitrage, we were content to sell at a slight premium to the initial bid.

From Wallace Weitz's first quarter letter to shareholders.


Check out Wallace Weitz latest stock trades

John Rogers of Ariel Funds Comments on Dell - Aug 17, 2012

From John Rogers second-quarter commentary:

Founded in 1984 in Michael Dell's University of Texas dorm room, Dell Inc. (DELL) has grown into a leading global supplier of personal computers. For much of its history, the company differentiated itself with its unique, direct-to-consumer business model, which resulted in highly customized products, substantially lower inventory levels and impressive free cash flow characteristics. Today, that competitive advantage has largely been competed away and investors have grown fearful that a new onslaught of mobile form factors represent the demise of Dell's business. Yet, we see several reasons why this view is overly pessimistic, including the upcoming launch of Windows 8, an evolution towards enterprise solutions and the leadership of Michael Dell.

The PC is Alive and Well

The trend in computing today is towards increasing mobility. Mobile phones and tablets are no longer peripheral luxuries, but rather integral pieces to an always-on computing experience for both consumers and businesses alike. Apple, in particular, has been on the forefront of this movement, forcing its competitors to either innovate or lose share. With approximately 70% of revenues tied to personal computers, Dell has been viewed as particularly exposed to this disruptive innovation. However, whereas Apple has made tremendous inroads with the consumer, enterprises have been slow to switch, choosing instead to exercise patience for more compatible and secure Windows 8 based mobility products due out this fall. As a top global supplier of Windows-based PCs, Dell is well positioned to win where it matters most, the enterprise.

An Enterprise Makeover

Perhaps the most underappreciated piece of the Dell story has been its relatively recent transformation towards enterprise solutions and services. While investors have focused on its PC business, the company has built an enterprise solutions business that today generates approximately 30% of revenues and 50% of operating profits. Importantly, Dell has carved out its own niche by forming sticky relationships with small and medium businesses and public clients. As the mix evolves towards more solutions and services, the future for Dell looks bright.

The Return of Michael Dell

Michael Dell's tenure at Dell has been characterized by rare foresight. When he first founded the company, he saw that selling direct to the consumer would revolutionize the PC industry. When he returned to the company again in 2007, he quickly began to shift the business towards faster growing and more profitable enterprise solutions and services. Since then, operating margins have increased nearly 2%, earnings power has increased 65% and the company has accumulated a net cash balance of over $5 per share. While the evolution continues, we take comfort that a best-in-class leader is at the helm.

A Bargain Price

We view this period of transition for Dell as a tremendous buying opportunity. The drop comes amidst the company's shift from PC specialist to service and hardware provider. In our view, the current stock price assigns a low value to the enterprise solutions business, and almost no value to the PC business. As of June 30, 2012, shares traded at $12.52, a 42% discount to our estimate of intrinsic value.


Check out Michael Dell latest stock trades

David Einhorn on Dell (DELL) - Jul 24, 2012

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.
Check out David Einhorn latest stock trades

Bill Nygren Comments on Dell - Jul 10, 2012

From Bill Nygren's second-quarter letter:

Today we are focused on the growth of Dell (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.
Check out Bill Nygren latest stock trades

Mason Hawkins' Southeastern Asset Management Comments on Dell - May 23, 2012

Summary: Of everything they own, they measure on 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 metric they want to, that revenue growth is low. Southeastern does not care about that. Most relevant 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. Sells for cheaper multiples than IBM and believe it will outgrow IBM in the next decade. Believes there could be a surprise after November when U.S. companies are not treated discriminatorily as they are today and our tax policies allow us to bring our foreign cash back to the U.S. Dell has $5 in net cash predominately overseas and if that comes back to the U.S., they will be more aggressive on the repurchase front therefore building more intrinsic value per share at low risk. That cash earns very little and contributes almost nothing to current earnings so there’s great opportunity to put it toward acquisitions to add to earnings power or used prospectively if we have the laws changed for us to repatriate it back to the U.S.

Listen to complete audio here.


Check out Mason Hawkins latest stock trades