Disgruntled Investors Could Deep-Six Dell Deal
Feb 12, 2013 5:00 AM PT
Dell's plan to go private in what would be one of the biggest leveraged buyouts in recent years appears to be in jeopardy. Some of the company's largest shareholders have come out against the move.
Southeastern Asset Management filed with the Securities and Exchange Commission a letter it sent to Dell's board of directors warning them that it will vote against the deal because it "grossly" undervalues the company.
The deal "appears to be an effort to acquire Dell at a substantial discount to intrinsic value at the expense of public shareholders," the letter says. "We would have endorsed a transformative transaction that would have provided full and fair value to Dell's public shareholders, including a leveraged recapitalization or a go-private type sale where current shareholders could elect to continue to participate in a new company with a public stub."
With an 8.5 percent stake in Dell, Southeastern has the clout to launch a proxy fight and pursue litigation claims, the letter notes.
There are other options Dell might consider, it says.
Southeastern is not the only investor dismayed by the offer -- Alpine Capital Research and Schneider Capital Management have also said they were against the buyout for similar reasons.
The opposition to the transaction did not take long to gel -- it was only last week that Dell made the proposal to take itself private in a leveraged buyout. Under the proposed terms, Dell stockholders will receive US$13.65 in cash for each share of Dell common stock they hold.
A Valid Point
These investors have valid points as they make their case against the LBO, said Charles Sizemore, manager of the Dividend Growth and Tactical ETF models at Covestor.
"Applying a P/E ratio of just 12 would get you a stock price of nearly $18. Applying a price/sales ratio of just 1 would get you to $33 per share," he told the E-Commerce Times. "Even though Dell's offer to pay what amounted to a 25 percent premium over the pre-announcement market price, there is a case to be made that it is far too low."
The shareholders may also be concerned that Dell has had several "strategy reboots" without success, and this time it would probably be saddled with the debt required to go private, noted David Cadden, a professor in the entrepreneurship and strategy department at Quinnipiac University.
Indeed, if Michael Dell raises his price, Dell would presumably have to take on more debt to make the deal happen, Covestor's Sizemore said. "Having too high a debt load is risky for a company in a fast-changing sector like tech."
Getting Them on Board
What Dell can do to bring these shareholders on board with the plan is unclear.
Dell could change the terms and raise the price above the $13.65 that's on the table, suggested Barry Randall, who runs the Crabtree Technology Model for Covestor.
It could include a one-time dividend payment to current, pre-private investors, he added.
Dell could also remind investors that the share price had been languishing and that the market had largely given up on the stock, Sizemore said.
Dell is worth more than what was offered, but the bottom line is that a company is only "worth" what someone is willing to pay for it, Sizemore maintained.
"It always takes two parties to value a company: the buyer and seller in a transaction," Covestor's Randall told the E-Commerce Times.
"If Dell was worth the $24 per share that Southeastern Asset Management claims, it would have been trading at that price before the current takeout effort started," he argued. "It's worth what the last trade by two parties in an arms-length transaction said it's worth."