Suppose Carl Icahn calls you and proposes a deal. He is working on this potential turnaround deal similar to the many other ones he has done in his 52-year career, and this one may be the huge deal people will always remember him by. So he will work very hard on it, as he always has, and you don't need to do a thing. In the end, you can choose to 1) make a small profit early, 2) make a bigger profit slightly later, or 3) go all the way and split profits proportionally with him down the line. He doesn't make a dime until you make your profits. What's the catch? There is no catch. Are you in?
This is a hypothetical scenario; Icahn is too busy to call you. But the deal is real. Dell Inc. (DELL) is trading at $13.05, and Icahn owns an 8.7% stake in the company with an average cost of $13.58 per share. You can enjoy the hard work of a fine capitalist in his prime, with an average cost lower than his.
As Icahn has said, attempting to determine if the market will rise or fall is a waste of time. There are too many variables. To be a successful investor, one must look for situations where the risk/reward ratio is greatly in your favor. Will Dell Inc. (DELL) investors make money with 100% probability in this case? No. However, once Icahn picks up his phone and calls his miraculous new Dell Inc. (DELL) CEO and arms him with all-star new board members, the winning odds start to greatly turn in your favor.
What gets billionaires out of bed in the morning? More billions. This morning, Icahn got out of bed knowing Dell Inc. (DELL) is worth much more than $18 per share. He intends to buy out the majority of shareholders and do a turnaround. Michael Dell got out of bed knowing Dell Inc. (DELL) is worth much more than the $13.65 per share that he wanted to pay. He very much wants to close the deal, and Dell Inc. (DELL) canceled the July 18 vote as there appear to be insufficient votes to pass the deal. It is likely that Michael Dell may sweeten his offer before July 24.
At the current $13.05 per share, Dell Inc. (DELL) is trading at its February 1998 level. In February 1998, the great PC age was in its early phase and billions of PCs would be sold in the coming years. Who could have imagined that over the next 15 years, the technology golden boy Dell Inc. (DELL) would create almost zero shareholder value (including four 8-cent dividends)?
Today, the PC is dying -- iPads and smartphones are killing it. The future of the PC looks dire, so this is the time to buy Dell Inc. (DELL). And Icahn and Michael Dell are fighting for it. Icahn's track record is not bad. Although his net worth of $18.6 billion is lower than that of some other capitalists, his net worth is in after-tax dollars. His activist strategy requires a holding period often less than a year, and he pays the high short-term capital gain taxes. The other billionaires don't sell their stocks that often, and their numbers are in pretax dollars. In a perfect, no-tax world, Icahn should rank higher.
Icahn's Motorola deal showed how he does it. He picked good management that worked hard, and Google (GOOG) eventually paid a 64% premium for Motorola Mobility's intellectual property. A business is worth much more with the right management and good board. The new CEO may sell Dell Inc.'s (DELL) PC business to Lenovo (LNVGY.PK), reap the benefits from consolidation, and focus on high-margin service business.
If Icahn loses in the proxy fight, would it be so bad? Michael Dell may be forced to execute his turnaround plan, with Dell Inc. (DELL) being a public company. The likelihood of him succeeding is also high. Michael Dell also owns a big stake in Dell Inc. (DELL) and his name is on the door.
In my previous article, I listed Dell Inc.'s (DELL) recent acquisitions. Dell Inc. (DELL) has spent about $7.3 per share over the past few years, buying high-margin enterprise solutions businesses. Analysts estimate Dell Inc. (DELL) may earn $1 per share this year, and that's after the company cut its prices to gain market share. Let me speculate that Dell Inc. (DELL) may come out of the turnaround earning $2.35 per share, growing at 6% per year. Applying a 12x P/E, Dell Inc.'s (DELL) value exceeds $28 per share.
Let's say Lenovo or Google or Hewlett-Packard (HPQ) wants to buy Dell Inc. (DELL) -- they may pay a 30% premium. Maybe there are intellectual properties. Maybe there are global hidden assets. Maybe one of Dell Inc.'s (DELL) acquisitions turned into a PayPal or Alibaba. I don't have enough time or enough information to speculate. The turnaround specialist CEO that Icahn picks out of his army of smart guys will figure out. Or, if Michael Dell remains CEO, he should figure out. I don't micromanage. I especially don't want to micromanage Icahn or Michael Dell.
Worst-case scenario, Michael Dell sweetens his offer ($13.65 is just too low), the deal passes, and shareholders take a profit -- that's not too bad. I do not understand why people would want to speculate on market direction or pretend they know more about the future of Tesla (TSLA) than others, and yet pass on this Dell Inc. (DELL) deal. Can you lose money? Sure. But the odds are just in your favor.