The war for Dell Inc. (DELL) started when Michael Dell and private equity firm Silver Lake Partners made an offer to buy the company for $24.4 billion at a price of $13.65 per share. Immediately thereafter, the second largest shareholder Southeastern Asset Management said that the company was worth $23.72 per share and the activist shareholder Carl Icahn agreed that the offer undervalued the company. The two of them made an alternative proposal that would entail payment of an additional $12 per share in cash or in additional shares valued at around $1.65 per share. The company's board rejected this offer on the grounds that it would increase the risk profile while weakening the financial position because of the high level of debt involved and affect the ability to transform the company. Since more than 60% of the revenues would come from the weakening personal computer business after the deal, it was proposed that the company would concentrate on the Enterprise Solutions Group involving servers, networking and storage and Services. This would mean that, by the first quarter of 2014, a substantial part of revenues would be generated by these businesses.
The latest from Carl Icahn
In a recent open letter to shareholders, Carl Icahn has proposed that Dell should make a tender offer for approximately 1.1 billion shares at a price of $14 per share instead of the $13.65 per share offered by Michael Dell and private equity firm Silver Lake Partners. He argued that this would enable investors who thought that the $13.65 offer undervalued the company to continue to hold shares while providing other investors with the chance to tender their shares. He also disclosed that he has increased his stake in the company and is now the second largest shareholder after Michael Dell. He also said that the financing for his proposal was in place with debt of $5.2 billion, $1.6 billion from an investment bank, $3 billion from the sale of receivables and around $7.5 billion from the company's cash holding. This would still leave almost $5 billion for ongoing operations. The Dell special committee reviewing offers has rejected the offer.
First quarter 2013 results
The company has reported results for the first quarter in which it achieved the revenue estimates but missed the earnings estimate. Net sales declined by 2.4% to just over $14 billion against the consensus estimate of $13.5 billion but net income fell by 79.6% to $130 million which translates into an EPS of $0.21 per share against the consensus estimate of $0.34 per share. The decline in revenues was attributed to lower price realization in a difficult and declining market. The company reported increased expenditure on research and development as well as the sales force and engineering expenses which increased 34% from $234 million to $313 million. The poor performance in the personal computer business was offset by the contribution from software and services and services reported improvement in both revenues and profitability. Software which reported revenues of $295 million and an operating loss of $85 million is expected to be profitable from the first quarter of 2015. End User Computing ("EUC") which generates more than 60% of company revenues showed a 65% decline in net income to $224 million but Enterprise Solution Group ("ESG") unit posted a growth in sales of server and networking equipment of 16% from the same quarter of the previous year.
The implications of the buyout
Though Dell has been struggling with its business over the past few years, it has a strong balance sheet. It has cash and cash equivalents of over $12 billion and generates cash in the region of $3 billion every year compared to the long term debt of around $5 billion. The change in ownership could well enable the company to perform better. The company's management has already shifted focus from manufacturing to services in an attempt to improve the financial performance and Michael Dell's future plans include a continued emphasis on services and more attention to emerging markets. However, it is not particularly well positioned to grow in the personal computer market which remains the source of substantial revenues. With regard to mobile devices, the company is not particularly strong in tablets which are one of the fastest growing segments of the business.
The bottom line
In my honest opinion, it is hard to envision a dramatic turnaround in the fortunes of the company and there are better choices if you are looking for an investment in this business.