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Dell’s founder undervaluing firm? Quite the opposite

Dell chairman and CEO Michael Dell

Tibor Kolley/The Globe and Mail

The Dell deal is a bum one, says an angry chorus of investors who feel founder Michael Dell is striking sweetheart terms for a company that is worth billions more. Some suggest Mr. Dell is uniquely positioned to know the company's true (higher) value.

They should consider the opposite: Mr. Dell is too attached to the company to realize just how dim its prospects are. You could call it "founders (don't) know best."

To review: Dell has been one of the cheapest stocks in the S&P 500 for some time. Yoked to the declining personal-computer business – despite expensive attempts to expand into high-margin consulting – the company has consistently missed earnings projections. By November of last year, the shares had fallen to $8.69; they were just over $10 early this year.

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Mr. Dell's offer of $13.65 is a nearly 60 per cent premium over the 52-week low and a 25 per cent premium over the $10.88 closing price before buyout rumours surfaced.

Not enough, says value-oriented shareholder Southeastern Asset Management, who argues Dell is really worth more than $20 per share. Not enough, says activist investor Carl Icahn, who has taken a 6 per cent stake in the company and suggests Dell pay a $9 dividend – roughly $16-billion in total – by taking on more debt.

To be fair, they have a right to be angry; Dell has nearly $5-billion worth of cash (net of debt) that could have been used for a dividend higher than the current 2 per cent yield, or for significant share buybacks. (Dell would likely have to pay significant U.S. corporate taxes, though, as much of the cash is said to be overseas).

Instead, Mr. Dell and his financial backer, Silver Lake partners, plan to use Dell's balance sheet to pull off the going-private deal instead. The U.S. investing newspaper Barron's, which has been beating up Mr. Dell for several weeks now, says a fairer plan would be for Dell to spend $10-billion to make a tender offer for its shares at $15 apiece. Those who want to sell would sell; those who think Dell is worth more get a company with 40 per cent fewer shares.

If such a thing comes to pass, shareholders might be wise to sell. They might even be lucky to get the $13.65 Mr. Dell is offering.

Interestingly, Barron's notes in its most recent edition that makers of chips and hard drives may face a tough environment later this year, "given how little good news is in store for the PC market." The newspaper noted research firm IDC cut its estimate for 2013 PC shipments; it now expects a drop of 1.3 per cent versus its original forecast of 2.8 per cent growth.

Or, as the New York Times' DealBook noted in a piece called "The hurdles to a higher offer for Dell," "analysts are estimating that the company's earnings will decline nearly 10 per cent year after year."

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Friday marks the end of a "shopping" period in which the company can seek higher offers than Mr. Dell's. Don't expect any. Dell's core business is dying, more quickly than it expected and more quickly than the dissident shareholders seem to realize.

Mr. Dell isn't a sharp-eyed insider pulling off "the steal of the decade," as Barron's puts it; he's just not as delusional as his opponents, who think the shares can double. Let him have the company.

READERS: Is Mr. Dell taking investors for a ride, or is he just fooling himself?

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