I once wrote about post-announcement buyout plays:
Often, investors feel as if they have already missed the big play if they weren't in a stock before its buyout was announced. Sometimes, however, this isn't the case. There is a case to be made for making a modest gain buying directly after a company announces a buyout, as people already in the stock are at a rush to sell and potential uncertainties behind the transaction keep the price slightly lower than the bid price.
In this case, we have Dell (DELL), currently trading at $12.80 with two offers on the table - one for $13.75 and one for $14 with warrants. This should be enough to perk up the ears of savvy investors looking for an investment that has the odds stacked heavily in their favor.
Admittedly, I hadn't been following too much of the Dell buyout saga that's been dragging on now for what seems like several years - but has only been about 6 months.
In case you've missed the saga, here's a little background.
On February 5th of this year, Dell announced that a $24.4 billion leveraged buyout deal, led by Michael Dell, Silver Lake Partners, and Microsoft, intends to take the company private by purchasing shares at $13.65 each. It would be the largest technology buyout in history.
Dell's camp argued that since the price of the buyout was at a premium to the current market price, it should be voted through. Long-time shareholders and people who opposed the buyout cited that $13.65 is about just 20% of the company's all-time high and about 35% of the company's recent high of $40, reached in 2005. They, like the potential buyers, feel like the company is worth significantly more than $13.65/share.
Like many leveraged buyouts, Michael Dell himself is only fronting $750 million, about 1/18th of the $16 billion in debt that the company is going to take on. Once private, Dell stands to likely make tons of money from management fees and from hacking the company to shreds, as is often the case after most LBO's occur. This case is unique as Michael Dell, himself, is one of the major shareholders in the company; as is generally not the case with most LBOs.
Carl Icahn, notorious pest to corporations and generally not amused and hostile old man that curses live on CNBC, has other ideas. As a major shareholder in Dell, he's trying to block the buyout offer. He had offered Dell shareholders $14.00/share and a warrant for every four shares held. The warrant would allow the holder to buy Dell at $20/share anytime for the next seven years. His offer, along with the warrants, allow Icahn - who some common investors don't really trust a la Gordon Gekko - to give the public a general sentiment that he thinks the stock price could move much higher in the future.
Reuters reported that Dell stated in response:
"It is critical that Dell shareholders not be distracted from the clear choice they must make next week - take $13.65 per share in cash or bear the risks of continuing to hold their Dell shares," it said in a statement.
Icahn wants shareholders to vote against the buyout and then ask a court in Delaware, where Dell is incorporated, to appraise the fair value of the shares.
Dell shareholders will vote on the offer July 18. Dell's shares closed down 0.18 percent at $13.32, reflecting a lack of enthusiasm for Icahn's new offer.
Since then, the enthusiasm continues to flounder. Dell has broken below the $13/share price point, as shareholders clearly don't think anything of value to them is going to come their way.
As would SA contributor Charles Zhang, who makes a hell of a lot of sense in his evaluation of Dell's buyout scenarios in his recent article "Dell Value Exceeds $28/Share". He states:
What gets billionaires out of bed in the morning? More billions. This morning, Icahn got out of bed knowing Dell Inc. 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. 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. 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.
Well, Charles, consider that one nail hit directly on the head. Although I'm sure it's not as "sweet" of an amended offer as Dell shareholders would like, in principle he's right.
He's also right in insisting that we use a little bit of logic here. This entire fiasco with these two would not be going on if they both didn't think the company was majorly undervalued. At the end of the day, if either of the two parties is prepared to pay a premium to market, it's a suggestion that they think it's eventually going to be well worth it.
This morning, it was reported by CNBC.com that founder Michael Dell increased his offer by $0.10 to $13.75/share:
Dell's founder is boosting his offer to buy the struggling PC maker by 10 cents to $13.75 per share in hopes of attracting more shareholder support.
The move came just hours before shareholders of the Round Rock, Texas-based company were scheduled to vote on the earlier offer from founder Michael Dell and the investment firm Silver Lake Partners.
The company said it was delaying its shareholder meeting for a second time, moving it to Aug. 2 to give its board time to consider the offer. The meeting had been set for later today.
Michael Dell says the new offer increases the total amount paid to shareholders by about $150 million to more than $24 billion. They say it's their best and final offer.
Shareholders Carl Icahn and investment firm Southeastern Asset Management have said the earlier offer undervalued the company.
Time has marched on and investor fatigue is starting to set in, as longs are dumping Dells stock, in essence increasing the percentage gain premium for anyone that buys in advance of a $13.65 (or $13.75) buyout. I bought Dell in the high $12's and that's right about where it's trading today. Let's go down the potential list of happenings for someone that purchases the stock today at, let's say $12.75/share.
Worst case, Dell doesn't up his offer again and his offer for $13.75 passes on August 2nd - yielding a 7.84% return if you bought today.
Or, Icahn wins his proxy fight and seats his own Board, essentially taking control of the company. From there, the sky's the limit - Icahn has an average stake in Dell at $13.58 - today's your chance to get in under that and let one of the all time kings of deals do your profit making work for you.
Sure, there is risk here, but not enough for me. There's always a risk that both scenarios don't happen and the company valuation sinks further. However, it's this investor's opinion that it's likely that one of these two scenarios push through, and both are likely to yield a significant return for anyone that's buying in at the $12.75 range today. Best of luck to all investors.