Dell (NASDAQ:DELL) has rallied 20% since news hit that two private equity firms are attempting to acquire the computer company. Since then, rumors have spread, speculation is running wild, and the stock continues to fly. Yet throughout the process, I can't help but think of Clearwire (CLWR) and the disappointment that followed Sprint's (NYSE:S) offer to acquire the company. Allow me to explain:
Since the end of July, shares of Clearwire have soared nearly 200% as speculation of a takeover created optimism. Clearwire has margins that can only be explained as pathetic, but it has a very valuable asset called spectrum. Spectrum allows for an easy flow of data -- think about data like an interstate -- a shortage of spectrum would be like bumper-to-bumper traffic, while a supply of spectrum allows for a better flow of data. Therefore, having spectrum as a company that relies on data is highly valuable.
To make a long story short, Clearwire rallied to prices above $3 as speculation continued to grow; then, Sprint made an offer to acquire the company at $2.97 following its deal with SoftBank (OTCPK:SFTBF). As a result, Clearwire investors were enraged, feeling that the company's spectrum was worth loads more than Sprint was willing to pay. Therefore, we've seen institutional investors attempting to fight the acquisition, with the FCC and Dish Networks (NASDAQ:DISH) playing what appears to be a game of chess to break up the deal to partner with one of the two companies (although we don't know which one). The bottom line: Clearwire ran up higher before the acquisition, and now investors are upset that there was not a higher premium offered that took into account its run higher.
If Sprint would have made the same offer to acquire Clearwire back in September 2012, my guess is that everyone would've been happy with the 90% premium. However, investors quickly forget that what pushed the stock higher was essentially the speculation of an acquisition. Therefore, when the acquisition offer was based on the pre-rally price, we become upset. Now, back to the point of the story -- could this happen with Dell?
We as investors have a tendency to purchase a stock when we think the company is going to be acquired. The reason we do this is for the quick gains. It makes sense, right? However, we must remind ourselves of one fundamental fact: Companies such as Dell are acquired because of being cheap, and the gains that follow "rumors" will quickly tumble when no acquisition takes place.
According to Fortune senior editor Dan Primack and billionaire Wilbur Ross, there is a 50/50 chance that Dell will be acquired. Primack believes the deal may be too big; plus, there are concerns that although the company's cash flow is strong, it's also declining. The company saw its revenue decline 10% in its latest quarter, and recent data from Gartner suggest that PC sales fell more than 4% during the holiday season.
Dell trades with a price/sales of just 0.36, and at just 5x next year's EPS after net cash/investments. As a result, there are many reasons to believe that Dell will be acquired, but there are also concerns. As of now, Silver Lake and LBO are the firms that are in advanced talks to acquire the company. However, as Primack notes, aggressive accounting and financing will have to occur for a deal of this size to be completed.
Whether or not the deal gets done is not my concern, as I am not attempting to dissect the fundamentals to determine if it will happen. My concern, and my plea to investors, is to be observant of the price-per-share and the valuation of this company as it rises prior to the supposed "takeover." If completed, this would be a massive deal for a private equity firm. In fact, it would be a massive deal for any company to complete, much less a private equity firm.
Dell has now increased in value by 20% since the rumor of the potential acquisition was reported by Bloomberg. My question to those of you who are holding shares is, what premium do you expect for the stock? If the two parties were in advanced talks, then I imagine the deal is already close to complete. At this point, it's most likely financing options that are being discussed. Therefore, do you expect a 40%-60% premium for a value company such as Dell -- a company that is in a struggling industry? My guess is that a 40%-60% premium was never discussed when these talks first began, and most likely, discussions have been taking place for the last few months.
So far, two analysts have weighed in with their opinions for a potential per share price tag. Topeka's Brian White says $15-$18 per share is "possible," and Jefferies' Peter Misek believes that $15-$17 is "achievable." While these analysts may be correct, I urge retail investors to learn from the events of recent history and use the Sprint/Clearwire bid as a gauge of what to expect.
Some people might suggest that Dell hasn't run up 200% like Clearwire prior to the Sprint offer, therefore, a large premium will be offered. However, Dell is a much larger acquisition, Dell doesn't have spectrum, and Dell has rallied 35% in the last three months, when these negotiations most likely began. Perhaps Dell is purchased for $16, and everyone is happy. But at this point, considering its recent rally and the scope of its business, I suggest that investors be very cautious, as it's never a bad idea to take some profits off the table.