Currently, there are few stocks as controversial as computer maker Dell Inc. (DELL). In early February, DELL announced a $24 billion deal to be taken private by a group led by founder and CEO Michael Dell. This deal values Dell shares at $13.65 per share. In early March, a month after the deal was first announced, famed activist investor Carl C. Ichan accumulated a 6% stake in the company at prices above $13.65. Ichan has suggested that the company lever up and pay a massive one time special dividend. Following Ichan's move, another famed investor, James Chanos told CNBC he is short Dell. I have tremendous respect for both Chanos and Icahn. However, when it comes to Dell, I am long the stock and siding with Icahn not Chanos.
Chanos vs Icahn
Jim Chanos is one of the great investors of our time. I have been so impressed with Chanos that I wrote a piece in late 2012 entitled Why Investors Should Listen To Jim Chanos. That being said, I am of the opinion that Chanos is operating in foreign territory when it comes to Dell. The Dell story is all about the buyout, not the state of the business. Perhaps Chanos is right about the weakness of the business itself but that does not change the fact that clearly there are interested buyers for Dell. Historically, Chanos has not made his money by betting on or against takeovers. Rather, Chanos has been more of a macro player. Take, for example, his recent bearish stance on China which has played out quite well for Chanos. In contrast to Chanos is Carl Icahn who, when it comes to Dell, is operating on home turf. Icahn has made his money as an activist investor in many deals much like the Dell one. Icahn knows exactly what he is doing here, and I suspect he will end up getting a higher price for Dell. Days ago, Icahn entered into a confidentiality agreement with Dell. Simply put, I am betting on Icahn because deals like Dell are what he does. If we were talking about a difference in opinion over the macro outlook, then I would likely side with Chanos not Icahn.
As shown by the chart below, over the past three months, roughly the time since a Dell deal was first speculated about by the media, shares of Dell's closet rival, Hewlett-Packard Co (HPQ), have rallied more than 46%. Comparably, Dell shares have risen by only 35%. Given HPQ's recent run, it is fair to say that the value of Dell has increased substantially since the deal was first announced. This is one reason why I am optimistic that Dell shareholders will receive a higher offer than the current $13.65. If no better offer materializes, or worse yet the deal falls apart, as Chanos hopes, I am not sure how much downside Dell shares have at this point. Certainly, I would not expect Dell shares to trade anywhere close to the single-digit lows seen in late 2012.
For investors who agree with the Chanos thesis regarding Dell, I would suggest going short rival HPQ instead as HPQ is not involved in a buyout, much less one with involvement from legendary deal maker Carl Icahn. HPQ has rallied more than Dell despite not receiving a buyout offer of any kind, like Dell has. My expectation is that, as opposed to Icahn's proposed special dividend, Dell eventually gets taken private at a somewhat higher price than where shares are trading today, likely in the high teens as opposed to the mid-teens where Dell trades today.