It now appears that Dell (DELL) will go private in what is being made out to be a strong arm deal of epic proportions. A consortium made up of Michael Dell, several private equity firms, and even Microsoft will take the company private at what is believed to be a ridiculously low multiple.
The $24 billion deal basically values the company at eight times earnings, a low price for any control owner. Small shareholders are voicing their distaste for the deal all over the internet, from Yahoo message boards to investing social media.
For those of who aren’t invested directly in Dell, there are a few things we can still stop to reconsider as we pick future investments:
- We’re Small Fries – The deal will likely go through with the help of the largest shareholders, many of whom will remain shareholders in the company after going private. The largest shareholders (including Michael Dell at 16%) can come together to push out small investors without breaking a sweat. A deal only needs 50% to go through, not 100%.
- Founding Executives can be Wildcards – I have nothing more than anecdotes, but there appears to be something with founders making irrational decisions for the rest of their shareholders. In 2008, Yahoo founder Jerry Yang turned down $31 per share for Yahoo from Microsoft, only for the company to languish in the following years. Now, Michael Dell is proposing a deal at what many believe is a below-market price for his own benefit to restore the company that shares his name. It’s only logical that founders would have more attachment to their companies than non-founding executives.
- Bad Timing Can Ruin Good Investments – The Dell deal comes at a time that the entire PC industry is trading well below historical multiples. Comparable company analyses are used to justify prices for the sale of a company. Dell’s private offer comes after a very good comparable, HP, announced a huge accounting misstep and massive quarterly losses.
- Bad Moves Can Bite Twice – Dell spent billions of dollars repurchasing shares well above the buyout price, essentially wasting shareholder capital to later reduce the take-private price insiders will pay for the company. Furthermore, Dell executives spent years denying shareholders larger dividends with foreign cash, but it’s likely that cash will come back from overseas to help finance the take-private bid.
- Bigger Isn’t Always Safer – The sheer size of the company makes it difficult for anyone to race in with a competing bid. If this were a smaller company, it could be swallowed by a single institutional investor. Any deal with Dell requires several massive participants, but there aren’t several massive participants left that can step up.
- Management Can Be Greedy – There was an alternative to a take-private bid, a leveraged recap, which would keep interested shareholders in for the turnaround while increasing the stakes for major partners and shareholders. That option was taken off the table, vesting 100% of the upside in the hands of new partners and current Dell management.
The market seems to expect that Dell will go private without any other offers or discussion. A new bidder has only 45 days to step up, and there doesn’t seem to be much to stop the consortium of bidders from snapping it up.
The major take home lesson might just be that who you partner with matters. While it’s good to see that management and institutional investors make up a big portion of the share count, very concentrated ownership can also come back to bite you. It doesn’t get much worse than getting taken out at a loss by a bid many believe to be much too low, but too big to fail.
What are your thoughts on the Dell deal? What about these ugly investment realities to begin with?