What If Michael Dell Doesn't Really Want to Buy Dell? This Could Be "The Dell Put!"
Feb 14th 2013 11:30AM
The proposed management-led buyout of Dell Inc. (NASDAQ: DELL) is far from being without controversy. When the deal was still in the rumor stage, we came up with a maximum valuation of $15.00 per share (down to $13.60) for what a buyer would pay and what the shareholders might agree to. With the buyout price currently set at $13.65, it is no shock to us that the top institutional shareholders are effectively fighting the price.
24/7 Wall St. has a different take than what the media reports have been covering. We are not really convinced that Michael Dell really wants to acquire Dell in a management-led buyout. Sure, he wants it. We just think there is a backup plan in the works that is not being reported in the mainstream media.
The size of the deal alone is massive, and repatriating the overseas capital to help pay for the deal will come at a steep price. Our take is that investors need to consider this effort as "The Dell Put!" being the worst case scenario. The best case scenario would be a higher buyout price. Either way, Michael Dell's effort here may have ambitions other than what the headline flow and media coverage might have you believe.
So, if Michael Dell is not really interested in taking the company private, the end result is that Mr. Dell is really trying to establish a floor price in the stock. Will that floor be $13.65? Not likely. Maybe Michael Dell thinks that the downside of the deal falling apart is that the stock will not really trade under $12.50 or $13.00 in the future.
To get to this thought, all you have to do is step into the mind of a billionaire whose fortune is largely tied to the share price of a company. That is not just any company, but the share price of a PC-maker. Now that Apple Inc. (NASDAQ: AAPL) has been waging war on Windows-based PCs and winning, and now that Hewlett-Packard Co. (NYSE: HPQ) is in a multiyear disarray, this has to be scary for Mr. Dell. Getting Microsoft Corp. (NASDAQ: MSFT) makes for yet another interesting angle. If this deal falls apart, maybe Michael Dell would still consider including Microsoft as a financial partner ahead. Think about how you would like to be the king of yesteryear's technology trend that has been passed by.
Our opinion is that the Dell LBO may end up being a very intelligent share price hedging maneuver by Michael Dell. If he does not get to acquire the company outright, he can at least say in a press release, "This deal was deemed today as not being an attractive price for Dell's shareholders. These shareholders can have the comfort that I have a standing offer at or close to the proposed $13.65 share price, and I am willing to resubmit this offer in the future when the mix of shareholders owns shares at a lower price."
Would that establish a formal floor in Dell common stock? Not really, but in theory …. No formal floor can be set in anything other than zero. What it might do is set an implied floor of 5% or 10% under the proposed $13.65 share price. Maybe that is $13.00, maybe $12.50, maybe even $12.00. We would note that Mr. Dell is taking a lower price per share to facilitate the merger. That does not actually influence our opinion that he is trying merely to establish a floor in the price. You have to remember that Dell's original shares have a value of close to $0.00 outside of the shares he has bought on the open market. Michael Dell and investors affiliated with him agreed that their shares would be valued only at $13.36 per share, as opposed to the $13.65 price offered to the company's unaffiliated stockholders.
Does this mean that $13.36 is a floor? No, not really. Mr. Dell probably has in the back of his mind that the floor might be $12.50 or somewhere around that. Dell's stock was right around $11.00 before the buyout news surfaced. Shares have even traded under $9.00 in 2012. If Michael Dell can spend a few months of effort and a few hundred million trying to get this deal done, the backside implied floor (the Dell put) would add enough value to Dell's share value to make the whole exercise worth the effort.
Having a 45-day "go shop" period is not out of the norm. Note that, again, this allows the world of brokerage firms and strategic buyers to go out and see if Dell could or would be acquired for a higher price than $13.65 by someone else. This would allow Mr. Dell to possibly take the money and run into the sunset. Again, it leads to the argument of a "Dell put" that might bring about some sort of floor that is much higher than what the stock market took Dell down to before this buyout surfaced.
Investors need to consider that buyout rumors around Michael Dell trying to take the company were around before they came back up this year. If the special committee admits that it held 25 formal meetings, this would have been in the works for quite some time. With Dell's share price having been so low before the buyout, that only brings more credibility to the price ambition in the deal. Michael Dell appears to have figured out how to engineer "The Dell Put."
If you want more evidence of a floor, the current share price indicates that investors are either going to fight for more or will sue to get more money. Again, that is an implied floor. Dell shares are up at $13.82 on Thursday, against the $13.65 per share buyout price.
All we ask in this line of thinking is to put yourself into Michael Dell's shoes. He built an enviable empire and became a multi-billionaire. By taking the PC-giant private he would have only a handful of people to answer to. If a buyer comes in with a higher bid, he gets even more money and can move on. If he ends up unable to buy the company and is "stuck," he might have established a much higher price as a floor. You might not like the price that he wants to pay for his company, but it is hard to argue that his move is not genius here. This whole effort may simply be The Dell Put.
We would note that the Dell proxy statement was issued in an SEC filing this morning. We have added in some of the answers to the questions brought up below.
How many times did the Special Committee meet? Prior to the signing of the proposed transaction, the Special Committee held over 25 formal meetings, in addition to participating in six Board meetings including only independent members of Dell's Board.
What role did Michael Dell play? Mr. Dell agreed contractually not to enter into any agreements with any bidder without prior consent of the Special Committee and to remain willing to work in good faith with any bidder for the Company. Mr. Dell also provided oral assurances to the Special Committee that he was willing to work with whatever party might emerge as the high bidder, as well as to execute alternative strategies that the Special Committee might recommend if it determined that Dell should continue as a public company.
What alternatives to a sale transaction did the Special Committee consider? The Special Committee reviewed the Company's strategies in the end user computer and IT services markets, assessed the market challenges the Company faces, and considered the potential risks and rewards of a broad array of alternatives, including continuing to execute the Company's existing business plan; modifying the Company's existing business plan; effecting a leveraged recapitalization or change in dividend policy; seeking to separate the Company's end user computer business; seeking to dispose of the Company's financial services business; seeking to accelerate the Company's strategic transformation through acquisitions; and seeking a sale to, or merger with, a strategic buyer… After this review, which spanned over five months and involved substantial input from the Special Committee's financial advisers and its management consultant, the Special Committee unanimously concluded that the going private transaction was in the best interests of Dell's stockholders.
How was the $13.65 per share price determined? The $13.65 per share price was the result of bids and arms-length negotiations between the Special Committee and Silver Lake that began in late October. At that time, initial bids were made by Silver Lake and one other financial sponsor, each of which proposed to team up with Michael Dell. After the Special Committee asked for revised bids from both parties, Silver Lake increased its proposed price and the other financial sponsor dropped out of the process. At that time, the Special Committee invited a third sponsor to join the process and commence diligence. After several weeks of work, that third sponsor also dropped out of the process. There followed extensive negotiations between the Special Committee and Silver Lake regarding price and additional terms. The price of $13.65 per share was the product of final stage negotiations between Silver Lake and the Special Committee. In order to facilitate a price increase by Silver Lake, Mr. Dell and related persons agreed that their shares to be rolled over in the proposed transaction would be valued only at $13.36 per share as opposed to the $13.65 price offered to the Company's unaffiliated stockholders. Both of the Special Committee's financial advisers rendered opinions to the Special Committee and to the full Board of Directors that, subject to the various assumptions and qualifications set forth therein, the $13.65 per share to be received by the Company's stockholders (other than Mr. Dell and certain other excluded stockholders) was fair, from a financial point of view, to such stockholders.
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