Congratulations are in order for Mr. Dell and his partners on the announcement to pay $13.65 per share to take Dell (DELL) private. However, it was surprising that Dell's board agreed to the price. Here is why.
When Dell purchased Perot Systems this is the discussion on premium paid:
On September 18, 2009, the last full day of trading before the public announcement of the terms of the Offer and the Merger, the closing price of the Shares on the NYSE was $17.91 per Share. On October 1, 2009, the last full day of trading before the commencement of the Offer, the closing price of the Shares on the NYSE was $29.72 per Share. The Offer Price represents a premium of approximately 67.5% over the closing price of the Shares on the NYSE on September 18, 2009, the last full day of trading before the public announcement of the Offer and the Merger, a premium of approximately 76.5% over the average closing price of the Shares one month prior to such announcement and a premium of approximately 115.4% over the average closing price of the Shares for the one year period ended September 18, 2009.
With the Quest Software purchase the discussion was:
The current and historical market price of the Company common stock, including the fact that the Per Share Merger Consideration represents a premium of approximately 44% over the closing price of the Company common stock on March 8, 2012, the day before the Company announced its entry into the Insight Merger Agreement, and 37% and 42% premiums over the 1-month and 2-month average trading price prior to such announcement, respectively;
The Compellent purchase.
The fact that $27.75 per share represents a premium of 46% to the estimated unaffected stock price of $19 per share. See "The Merger - Opinions of Compellent's Advisors" for a description of the estimation of an illustrative "unaffected" share price of Compellent common stock.
The fact that $27.75 per share represents a premium of 26% to the three month average closing trading prices of share of Compellent common stock;
the fact that $27.75 per share represents a premium of 133.9% to Compellent's stock price of $11.86 per share on the day prior to the date of announcement of Dell's initial offer to acquire 3PAR and a premium of 84.9% to Compellent's stock price of $15.01 per share on the day prior to September 1, 2010, the first day of the speculative rumors about Compellent's possible acquisition;
This is in the Dell proposal to go private:
Under the terms of the agreement, Dell stockholders will receive $13.65 in cash for each share of Dell common stock they hold, in a transaction valued at approximately $24.4 billion. The price represents a premium of 25 percent over Dell's closing share price of $10.88 on Jan. 11, 2013, the last trading day before rumors of a possible going-private transaction were first published; a premium of approximately 35 percent over Dell's enterprise value as of Jan. 11, 2013; and a premium of approximately 37 percent over the average closing share price during the previous 90 calendar days ending Jan. 11, 2013. The buyers will acquire for cash all of the outstanding shares of Dell not held by Mr. Dell and certain other members of management.
On February 4th, 2013 the day before the merger announcement Dell closed at $13.27. If Dell offered the 84.9% premium that Compellent enjoyed before rumors, then the price would have been roughly $20.00 If Dell offered the 44% premium Quest Software enjoyed the day before the merger announcement, then the price would have been roughly $19.00. If Dell offered the 67.5% premium that Perot Systems enjoyed, then the price would have been roughly $22.00. If Dell offered a 25% premium on the more recently purchased, treasury stock then the price would have been roughly $19.00. If Dell offered the average price of the treasury stock on the balance sheet, then the price would have been $26.67.
So why is Dell only offering $13.65? It would appear that a price in the range of $19.00 to $26.67 might be more appropriate.
At $13.65, the board is agreeing to sell the entire firm for roughly $25 billion. Is this an admission that the $32 billion of owners' money given to departing owners was a mistake? Owners provided departing owners with roughly $7 billion more than has been agreed to sell the entire firm. This is a huge difference. Had the $32 billion been returned to owners via dividends, then the total enjoyed by owners would have been $57 billion.
The board approved the repurchase of shares in the more recent nine months, and Dell paid an average price of $15.22; why is the board now agreeing to sell the entire firm at a $1.57 per share discount on recently purchased treasury shares? Were the shares overvalued when purchased, or did the firm's prospects decline? The upcoming earnings release may shed some light on the issue.
Shareholders must take responsibility for the transfer of their money to former shareholders. After all, shareholders elected the board. Apple's (AAPL) investors may want to review Dell's share repurchase performance along with its own, before encouraging management to expand its share repurchase program. According to this 10-k filing, in August 2012 Apple entered into an accelerated share repurchase program.
The chart below shows the price performance since the ASR, impressive, isn't it? 2,582,782 shares were repurchased from September 30 to November 3, 2012 according to the 10-k. During this time the stock price ranged between $676.75 and $505.75. It closed February 8, 2013 at $474.98.
I purchased Dell shares after it announced it would pay a dividend. And after listening to a more recent conference call, was encouraged when an analyst asked about doing more share repurchases and Dell indicated that wasn't in the plan. I thought finally, the firm was going to reward owners, after all, it recently introduced a cash dividend, a good sign. I wrongly assumed that maybe Dell would suspend its share repurchase program and funnel the cash to owners via increased dividend or a quarterly / annual special dividend. Was I wrong?
Financial engineering is grand isn't it?
Now that Dell wants to go private, research must begin on where to reinvest and try to answer the question. Will the next desktop or laptop be a Dell? In my opinion, had Dell's board returned cash to owners, rather than to stock sellers, the price today might be far higher, being supported by a generous dividend. It is disappointing that the board agreed to the $13.65 price. Hopefully the Board will reconsider and negotiate a price closer to what it paid for treasury shares or a premium closer to what it paid for other firms. Time will tell what happens.
Disclosure: I am long DELL.