By Matt Doiron
Dell (DELL) founder Michael Dell and his financial backers led by private equity firm Silver Lake Partners, under pressure from competing initiatives from billionaire activist Carl Icahn (find Icahn's favorite stocks), have raised their bid to take the company private and convinced Dell's board to delay a vote on the proposed buyout until September. The stock rallied on the news, as over the past several days many investors had been concerned over risks to the deal, and is currently trading at about $13.65 per share.
The Dell-Silver Lake team's new bid would pay shareholders $13.75 in cash for their shares. In addition, the company's quarterly dividend of 8 cents per share would be paid prior to close in addition to a special dividend of 13 cents per share. So in total, current shareholders would expect to receive $13.96, a 2.3% return from where the stock is currently trading. If the deal were to close in the next three months, that would be at least a 9.5% annualized return.
Importantly, Dell's board has agreed to change the standard for counting shareholder votes for or against a deal. Previously, abstentions would have counted as no votes, and in fact Dell was forced to express mail voting materials multiple times to shareholders who had neglected to express their views in an effort to reach the threshold required for acceptance. The new standard is that the Dell-Silver Lake bid will only need to receive a majority of recorded votes, therefore making it much easier for the deal to be approved.
In addition, once Dell becomes seen fully as a merger arbitrage opportunity the stock will likely attract funds pursuing this type of strategy. The 2.3% return is not much to many retail or even institutional investors, but hedge funds often like to invest in merger arbitrage because the returns on the investment depend on whether or not the deal closes rather than on overall market conditions. Considering the lack of correlation with the market the nearly 10% annualized return would be quite appealing to these funds and it's possible that they would use leverage to increase their returns even further. Of course, any merger arb funds acquiring Dell would vote in favor of the deal. For this reason, a likely deal might become a self-fulfilling prophecy as existing shareholders increasingly sell out to merger arbitrage investors.
Icahn has tweeted that "the war itself is far from over" and has been pursuing legal avenues to try to prevent Dell from going private. He has also referred to the Board's new shareholder voting standard as "changing the voting rules midstream." He has also maintained an alliance with Southeastern Asset Management, an asset management firm managed by billionaire Mason Hawkins, which is a major shareholder in Dell. According to our database of quarterly 13F filings, which we use to help us develop investment strategies (we have found, for example, that the most popular small-cap stocks among hedge funds generate an average excess return of 18 percentage points per year), Southeastern had owned over 120 million shares of stock as of the end of March (find Southeastern's favorite stocks).
Icahn has been quite successful over the past couple years, seeing significant returns on his investments in companies including Netflix, Herbalife, and Chesapeake. The change in voting rules, however, seems poised to drive him off here (although the activist was somewhat successful in that the bid has been increased a bit from the initial offer). There is still a risk to the deal in that Icahn's lawsuits may crack through Dell and Silver Lake's plan in some way, but it certainly appears that a deal is becoming more likely and leaving investors facing a moderate-risk, moderate-return opportunity in buying Dell as a merger arbitrage stock.