Regular readers know that I’m not a big fan of Dell Inc for my own investment portfolio. The company’s stock (DELL) has underperformed for over 10 years. A series of high profile acquisitions (e.g. Compellent, SonicWALL, Quest Software) haven’t been large enough to move the needle on either the company’s revenue or its stock price.
Even the return in 2007 of founder Michael Dell to the CEO chair failed to recapture either significant revenue growth or even any semblance of ‘buzz’ or excitement about the company or its products and services.
I wasn’t surprised, therefore, when Michael Dell, along with tech-oriented private equity firm Silver Lake Partners, proposed taking the company private in an immense leveraged buyout. But equally unsurprising is the emergence of shareholders, many of them deeply underwater on their Dell investment, objecting to the terms of the proposed $13.65 per share deal.
No one really needs to point out that unilateral cries of "This great company is undervalued!" are illogical. It always takes two parties to value a company: the buyer and seller in a transaction. If Dell were worth the $24 per share that disgruntled Dell shareholder Southeastern Asset Management claims, it would have been trading at that price before the current takeout effort started. It's worth what the last trade by two parties in an arms-length transaction said it is worth. No more or less.
Of course, these aggrieved shareholders’ ‘cries for justice’ are simply a polite way of saying, “give us more money or we’ll make trouble.” Because they don’t really want the company to remain public in its current incarnation. It’s simply their way of extracting money from the transaction (and the company’s cash balance and the debt raised to finance the LBO). It’s like a victimless crime: who will be hurt?
And these institutional investors (including major hitters like T. Rowe Price) definitely have the means to scuttle the deal. Like a straightforward proxy fight: major shareholders responsible for perhaps 20-25% of the shares outstanding could use the proxy process to compel Dell’s Board of Directors to either give them greater board representation or to upsize the price and or terms of the proposed transaction.
How about a special one-time dividend payable from the $15 billion in cash currently on Dell’s balance sheet? It’s not going to be their problem if more debt needs to be issued to enable the deal to be consummated.
Or if they wanted to go to DefCon 3, big shareholders could resort to straightforward litigation. For example, they could bring a civil charge of fraudulent self-dealing by current insiders, including Michael Dell himself. This seems extreme, until you remember that several years ago Dell (the company) and Michael Dell himself paid fines to the SEC and settled related class-action suits with regard to issuing and valuing stock options. With Mr. Dell and his company already possessing “unclean hands,” the threat of litigation would be compelling.
Perhaps these activist shareholders will manage to wrest more money than the $13.65 per share currently on offer. But what they don’t want to happen is to have the company parted out and sold in pieces. Of course, this seems unlikely anyway, because unlike Hewlett-Packard (HPQ) and IBM (IBM), Dell isn't really known for strongly autonomous operating divisions within the company. And who would buy those divisions? HP itself, in its own world of hurt?
So while we watch this form of corporate Kabuki Theater play out in its formalized rituals, let’s ponder a larger issue: will going private really change anything for Dell (the company)?
Because the real problem for Dell (the company) will be that Michael Dell will still be in charge. Many go-private deals are done to cut costs or to bring in new, "tougher" management capable making “hard” decisions to bring about a new strategic direction. But Dell is already a famously bare-bones operation, and Michael Dell, architect of the ineffective growth strategy that brought the company to this point, will still be in charge.
And maybe that’s the telltale sign about why this is happening anyway: what’s Michael Dell’s motivation? Is a guy with a net worth of $15 billion really spending his precious time worrying about maximizing shareholder value? Is selling one more laptop going to bring him any more joy? In how many mansions can a man live?
I think this is entirely about Michael Dell deciding he’s got better things to do with the rest of his life than answer inane questions from Wall Street analysts on quarterly conference calls. Instead, why not go private, run his namesake business as a large, slow-growing technology firm, and spend time with his family, investing in fun little Texas start-ups, and giving generously to charity.
Here’s my prediction: the deal goes through, exiting shareholders get a couple of bucks more in cold hard cash, incoming bondholders get an extra 100 basis points and a year from now, we wonder whatever happened to Michael Dell.