Monday, March 18, 2013

Dell: The "Really" Real Issue

Holman Jenkins “The Real Dell Issue Is Michael Dell”,  March 13, 2013 Wall Street Journal opinion piece raises the right issue. Michael Dell is under no obligation, legal or moral, to offer shareholders a higher price. The “really” real issue is whether his offer should be accepted despite his having shareholders over a barrel due his inside control position.

Dells’ intrinsic value depends on the strategy employed and the management executing it. The current strategy involves diversifying away from its declining legacy core PC business towards a solutions based model. Unfortunately, others, including IBM, HP, Oracle, EMC, and Cisco, had the same idea years ago, and have established themselves as formable competitors in this sector. Despite years of trying and over $7B of questionable acquisitions, Dell is no closer to achieving its stated goal. Trying to accomplish this task in a highly leveraged capital structure is even more questionable. Hence, the pre bid price accurately reflected the then current intrinsic value based on its currently announced strategy. Nonetheless, all is not lost as Dell has a huge cash pile and still generates considerable free cash flow.
Michael Dell, is a very smart person.  My belief, or should I say suspicion, is that he recognizes the situation, and is prepared to change course towards an alternative higher value strategy. Namely, stop the diversification, manage Dell for cash and utilize the cash pile. This would likely increase Dell’s value. Unfortunately for Dell’s shareholders, Michael Dell understandably does not want to share the upside with them. Conveniently, the Dell Board has concluded that alternatives for sharing the upside, such as a leveraged recapitalization, would be less attractive to Dell shareholders.

This is the “really” real reason behind major shareholder resistance to Dell’s offer by Carl Icahn and others. Jenkins, while acknowledging this issue bemoans, the lack of alternative higher price offers. This issue here, however, is information and timing. Recently, interested parties like Icahn have signed non disclosure agreements giving them access to inside information that previously Michael Dell exclusively enjoyed. I expect that based on this information competing higher priced offers may be forthcoming. We are still in the early innings of this game. So I would suggest to Jenkins that he hold on a little bit longer as good things can come to those who wait.


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