I have been thinking about the Dell (DELL) leveraged buyout, Microsoft's involvement, and the momentous changes underway in the consumer and corporate PC markets. And it strikes me how so often the initial response is some sort of apoplectic outburst towards Microsoft (MSFT) and its titular personification, Steve Balmer.
Like lilliputians securing the beached Gulliver, Microsoft's detractors hum with fury as the company responds to innovation across its product offering. And the promise of change is evident, both in markets it has historically commanded and markets it has yet to really enter. Yet for all of their bellowing, the critics are likely to be disappointed by impending changes, as promising as they seem. Because where Microsoft is strong, it is massively so; it has very large shares of very large markets, and a very large revenue and asset base as a result. Even as growth falters, these things remain large.
The fact is, Microsoft enjoys a commanding lead in the markets it has always dominated (PCs and servers) and is displaying uncharacteristic, if modest, traction in new markets as well (tablets, handsets and most importantly, smartphones). Could this elephant indeed be nimble? This is a big question in need of a big answer. For now, let us say that only time will tell. The point here is that Microsoft has a vested interest in the outcome of Dell, one of its largest partners. And it looks set to assume a major interest in this large customer. Just what sort of say Microsoft could have in Dell's business is indeed a critical point.
Negotiations around these issues must indeed be intense. Snippets of insight leak randomly as if from a pulsar. But when we track these down, a larger picture emerges. Bloomberg reports that Michael Dell intends to contribute $500 million to $1 billion of his own funds, in addition to his 15.7% stake to the deal, in an effort to secure a controlling interest. The contributions from Microsoft and Silver Lake now range from $1 billion to $2 billion each. There is still talk, oddly, of using some of Dell's own company cash, technically owned by existing shareholders. Evercore Partners, retained to defend the interests of these holders, has apparently sought other buyers (unsuccessfully) and is considering some sort of debt-funded dividend recapitalization. And TechCrunch has suggested that Michael Dell's aim in this privatization is to steer the company towards the Enterprise and away from PCs, which is surely not a goal Microsoft would embrace or want to fund.
So the situation remains difficult and complicated. And surely management is less and less focused on its businesses, including the PC business. The sad fact remains that, whether or not the deal goes through, Dell has yet to escape, or even confront, its strategic conundrum: just how will the company direct its core PC business in a year of very significant change? It is not clear the company has an answer, or is even asking the right questions. In this light, it would seem surprising that the credit markets would fund $15 billion in new debt (on top of the $9 billion that is already there). But in this uselessly conducive environment, the capital is apparently there.
With all of this in mind, we wonder, is there a stock recommendation to be made? Dell shares traded down to $10 and change because it was not clear that the company had secured a steady path forward in its new and core markets. The authors of the acquisition plan have left and, beyond the leveraged buyout, a strategic direction has yet to be articulated. Still, even at $13.50 per share, the company is atrociously undervalued at 0.42x out-year revenues and 8.1x out-year earnings. Were management clearly focused on mending its businesses, investors' cheer would surely drive the valuation to a higher level that is still steeply discounted. Absent this focus, however, the situation is dicey, even for the risk-averse.