Dell (DELL) stock is enjoying a rebound today thanks to Institutional Shareholder Services (ISS) — the proxy advisory firm that, just this weekend, recommended Dell shareholders accept a bid from CEO Michael Dell and his Silver Lake Management partners to take the company private.
The stock had moved the other way last week on speculation that ISS was going to recommend a competing bid from the company’s second-largest shareholder Carl Icahn. With the support of ISS, it looks as though Michael Dell’s quest to take back the company he founded, at $13.65 a share, has legs.
Let’s take a look at who wins and who loses, assuming the deal goes through.
The obvious loser — at least on paper — is anyone who bought Dell stock at over $13.65 a share and is hoping for a resurgence. The company traded in the $14 range for several months this year and as recently as last year had cracked $18. Heck, investors who bought into the company back in 2004 could have paid over $40.
For these investors, the plan represents a significant loss. Another large Dell shareholder, Southeastern Asset Management, feels that — even in today’s declining PC market — the company should be valued at $23.72 a share.
Dell employees are also likely to lose in this scenario. Michael Dell is hell-bent on rapid transformation of the company; both he and Silver Lake are going to want to see fast results. That’s likely to mean layoffs in underperforming divisions.
As PCMag puts it, there are likely to be layoffs on the scale “that would make investors at a public company flinch.”
Then again, existing Dell shareholders — even the ones who bought in significantly above Michael Dell’s $13.65 offer — may be losers on paper, but they could also turn out to be winners in this case. Despite attempts to diversify into the enterprise services market, Dell has been hit hard by the declining world PC market; in its most recent quarterly earnings, the company reported operating income for its computer products (PCs, tablets and peripherals) was down 65% compared to last year.
If the computing division continues to drag on Dell and it takes any sort of hit in its enterprise services and solutions groups — a highly competitive market where it must compete against the likes of IBM (IBM), Cisco (CSCO) and Hewlett-Packard (HPQ), not to mention cloud-computing giants like Amazon (AMZN) and Google (GOOG) — a sub-$10 DELL is a distinct possibility.
Michael Dell’s bid could force Dell investors out before things get worse.
Speaking of Dell’s enterprise (and PC) competitors, they could also come out as winners. Consumers and business both hate uncertainty. Expect every other company in the industry to play the Dell uncertainty card while coming after the company’s customers.
Competitors could slow Dell’s growth into enterprise and services by emphasizing uncertainty, while PC competitors can prey on consumers’ worries that buying a Dell PC could leave them stranded with an unsupported relic if the company winds down its computer operations.
Hewlett-Packard even went so far as to put out a press release concerning Michael Dell’s bid, where it says: “We believe Dell’s customers will now be eager to explore alternatives, and HP plans to take full advantage of that opportunity.”
Last but not least, Silver Lake and Michael Dell of course both stand to win. I’ve written previously that Michael Dell — who believes strongly in his own management acumen, especially if freed from the encumbrance of public ownership — feels this is the best way to protect the billions of dollars he already has tied up in the company. By righting the ship, he expects to keep his investment from shrinking in value.
Plus, there’s the potential for reward.
Even with Dell’s declining earnings (this year the company is expected to make less than half of what it did in 2005), it is still a massive company in a high-tech sector that can be very profitable. If the deal goes through and Michael Dell can reverse fortunes, the rewards are split between the two partners instead of a rabble of shareholders.
As Forbes points out, if they offer the new Dell as an IPO at a later date, their combined $6 billion investment could represent a massive payoff, even if the new company was valued at just a fraction of the $24.4 billion their $13.65 bid represents.
And if its bid is turned down, Silver Lake reportedly gets a $185 million “breakup” fee from Dell. Not too shabby.
Of course, this is all assuming that the Dell/Silver Lake deal gets approved by shareholders. The vote is set for July 18 and, even then, it could take some time for the details — and thus the winners and losers — to shake out.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
