In my coverage of Dell (NASDAQ:DELL), I will admit to having been overly cautious.
Those who played the rumors have gained. After I asked on Feb. 3 how much of a premium Dell might deliver to new buyers, and basically said little to none, the deal to take Dell private through CEO Michael Dell was dutifully announced. If you bet against me that day and bought DELL, you're now 10% to the good. The biggest piece of that gain has come just in the last two trading sessions, as Dell announced the existence of two other bidders for the company, from private equity group Blackstone and investor Carl Icahn.
Blackstone is offering $14.25/share for all the Dell it can get, but will let some existing shareholders stay on for the ride. It would work with Morgan Stanley on the financing. Icahn has a price of $15/share, and would retain some of the big owners who objected to the Feb. 5 agreement. The Icahn bid, however, would wipe out Dell's cash and subject its receivables to factoring -- a complete cashectomy.
The Icahn bid means that there remains upside to Dell from its current market price of $14.50. Personally, I would not want to be a Dell employee, a retiree, or have my 401(k) funded through Dell stock if that were to happen. That's because the most likely way Icahn and his fellow investors would get their money out of this deal would be the Gordon Gecko way, by taking it out of employees and former employees.
Tech companies are cash-rich for a reason. Market conditions can change on a dime, as with a flood or earthquake sending component prices suddenly soaring. Cash acts a cushion, allowing product planning to take place and big parts orders to be placed without worrying about where the money is coming from.
There are ways in which such a deal can work, as with an operating company whose performance is high and predictable. The Glazer family, for instance, bought Manchester United with its own cash and loaded the resulting entity up with debt. They've done fabulously, but Michael Dell is not Sir Alex Ferguson, and Dell's present position is more like that of Blackburn Rovers. (If you prefer baseball analogies, substitute the L.A. Dodgers for ManU, and the Pittsburgh Pirates for Blackburn.)
A more businesslike analogy for what Icahn wants to do can be seen in the story of Harley Davidson (NYSE:HOG). It fell on hard times in the wake of the 2008 financial crisis and was then restructured, losing workers and facilities, cutting its dividend, but staying in place and eventually doubling in value. That's not the way the tech game is played, but if you want to speculate on getting a little more than $14.50/share within a fairly short time frame -- CEO Michael Dell is reportedly planning on sweetening his own bid -- be my guest.
You're betting you can squeeze another 50 cents/share out of the bidding over the course of a couple of months, a 3% return on the present price, possibly over three months. It may be worth waiting for shareholders who came in at $20/share and $30/share, as many did, but I wouldn't wait three months for 3% unless I had a lot of confidence it would come back, and in time.
Time, after all, is money.