If you're a long-term shareholder of Dell (NASDAQ:DELL), you probably aren't too happy with the current offer made by Michael Dell and Silver Lake. The offer is $13,65 per share, valuing the company at $24.4 billion. Unless you bought your position in the 2009 lows, or in the last 6 months, you will very likely be loosing money.
Aside from the obvious fact that Michael Dell and his partners see more value in the company than what they offer, or they wouldn't be offering anything, let's put the price into perspective.
In the first 9 months of 2012, the company delivered $2.3 billion in operating income, for a net income of $1.8 billion. With a quarter left, the full year net income will certainly be higher than $2 billion (in the last quarter of last year, net income reached $764 million), a value that would represent a Price/Earnings ratio of around 12 (24.4/2=12.2) for the current $24.4 billion offer,
In other words, if you reject the offer and the company earns at least $2 billion a year for the next 12 years, at the end of that time the company would have generated the same value that you are being asked to sell for right now. And more, at the end of that time, you would have that value in the company and continue to be a shareholder. It doesn't look like a great offer.
Another way to look at it, and continuing to use the conservative estimate of $2 billion a year in net income, is to see what that value represents in terms of return on your investment. If you sell your shares at $13.65, you will be giving away at least an 8.2% ($2 billion/$24.4 billion) return on your investment. And since that, in the last 4 years the company delivered a net income of $3.4 billion in 2011, $2.6 billion in 2010, $1.4 billion in 2009 and $2.4 billion in 2008, you would probably be giving away a higher return on your investment than 8.2%.
Now let's have a look at some balance sheet items. If the company was highly leveraged, things would be different and this price could make some kind of sense given the risk. But, if we look at the numbers, at the end of last quarter Dell had $11.2 billion in cash and equivalents, a long term debt of $5 billion and a total equity of $10.1 billion. In other words, a very healthy balance sheet.
Should you accept the offer?
Putting things together, it's very hard to recommend accepting the current offer. Unless you have another investment where you can put your money to work at a higher rate of return than you would by sticking with Dell (and with the safety of its balance sheet) I cannot recommend selling the shares at this price.
Of course, Michael Dell and Silver Lake know the company is worth much more, and that's why they are offering to take the company private.