Southeastern Asset Management believes that Dell Inc. is worth at least $24 (U.S.) a share, or 76 per cent more than what Michael Dell and Silver Lake Partners are offering shareholders as they seek to take the computer-maker private through a leveraged buyout. The stock market, though, doesn't believe for a second that a higher offer is in the works – and the market is right.
Dell shares fell as low as $13.45 on Friday, and closed 2 cents below the takeover offer of $13.65 that was announced this week following speculation that such a deal was in the works.
Observers had been expecting Southeastern Asset Management to say something about the leveraged buyout. After all, the asset manager is Dell's second-largest shareholder (after Michael Dell), with a 7 per cent stake worth almost $1.7-billion.
Up until this afternoon, Southeastern had kept quiet. A $20-figure was circulated that came from a Reuters article that simply delves into a filing from the end of September, in which chief executive Mason Hawkins said that the shares were worth in the "low 20s" even if you ignored the company's struggling personal computing business.
In a letter to Dell's board made public this afternoon, Southeastern said Dell's proposed sale price was "woefully inadequate," and argued that the company is worth at least $24 per share.
The comments did not come as a surprise, given the asset manager's bullish comments in a number of quarterly reports. In the third quarter of 2012, it acknowledged that Dell was the biggest single detractor from its Partners Fund. But:
"The company's transformation to a solutions-based company is well underway and leverages Dell's direct distribution advantage of over 20,000 employees responsible for customer relationships with small and mid-size businesses. Interestingly, IBM successfully refocused its business over a 10-year period starting in the early 1990's from mainframe hardware to multifaceted technology solutions for large-scale customers. The head of IBM's mergers and acquisitions was Dave Johnson, who joined Dell in 2009 to lead its strategy to enhance solutions offerings and has purchased a number of companies and products that have grown through Dell's expansive distribution."
In other words, Southeastern was happy to wait out a transformation at Dell – and is no doubt unhappy about losing the opportunity to do so, and take a substantial loss on its initial investment.
But will Southeastern have any influence on the deal? Regardless of the answer, investors looking for a short-term bounce in the share price will be disappointed.
If the answer is no, that Dell will not respond to the likes of Southeastern, then the deal will proceed at $13.65 a share, providing little upside from today's price.
If the answer is yes, the deal could fall apart because the overall price tag will push the company out of reach of Michael Dell and his backers. And if the deal falls through, the shares could easily fall back to where they were before rumours of the deal began to circulate. For all the apparent long-term prospects for Dell, that would suggest a short-term decline of about 25 per cent.
David Berman