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  • Is DELL Buyout Possible?

    Media has been speculating the price at which the buyout might happen. We feel $13-$14 the buyout is a definitely possible, since the buyout has the backing of MSD Capital the private investment arm of Michael Dell.

    While value investors make decent returns at the price being speculated (Investment Maxim Value Portfolio Subscribers make a cool 40-50% at a recommended price of $9.25, and Investment Maxim Facebook followers make 30-40% at recommended price of $10.45), long term investors stand to lose. A buyout price of less than $18 will be a smack in the face of long term investors who have stood with DELL in times of uncertainty.

    But is a buyout at $18 really possible? We have tried to play this scenario out to see if this is really possible. For investors/readers who want to understand how an LBO (Leveraged Buyout) works this would be a great read.

    At $18 per share the market cap of DELL would be $31.7B. Michael Dell has a stake of 14% which means the buyout would cost 86% of the market cap which is $27.3B. LBO's typically use debt to finance a buyout and financiers funding the buyout insist on a 10-30% equity/cash from the buyer.

    So let's say an Entity 1 is incorporated with 30% equity and 70% debt.

    Entity 1:

    Cash/Equity:

    Silver lake and partners (with 15% equity of $27.3B) =$4.1B

    MSD Capital (with 15% equity of $27.3B) = $4.1B

    Net= $8.2B

    Debt: (70% of 27.3) $19.11

    DELL:

    Cash: $14B (As per latest quarterly filing)

    Debt: $5B

    So Entity 1 buys out DELL from its existing shareholders and then merges Entity1 with DELL resulting in the following:

    Entity1+DELL (a merged entity)

    Cash: $22.2B ($14B+$4.1B+$4.1B)

    Debt: $24.11B

    The existing cash on the books is then used to repay the debt on the balance sheet. Some of this cash is parked outside US and there could be tax implications of repatriating the cash back so let's just say this is not repatriated. After repayment of debt the balance sheet would look like this

    Entity1+DELL (a merged entity)

    Cash: $3.2B

    Debt: $5.11B

    And low and behold Entity1+DELL (a merged entity) becomes private company with as much debt as they started out with and generating cash flows as before with

    Silver lake and partners holding: 40% approximately

    MSD Capital + Michael Dell: 60% approximately

    If you were wondering how DELL would get 60% when both contributed equally, it's because of 14% stake he held earlier in DELL. Silver Lake and DELL will come to a mutual agreement how much stake that would get converted to in the merged entity. We are assuming about 10%.

    Michael Dell can now turn this company around and improve the return on capital by expanding the enterprise solutions and services and cloud offerings. Once this is done Silver Lake and partners now can sell the stake 40% in the merged entity valuing it at $31.7B (let's assume the same market cap as before) at $12.68B making a whopping return of 209% on $4.1B investment they made. Michael Dell now controls the private entity with a 60% stake versus the 14% he held in the public entity.

    So a buyout at $18 is definitely possible but the question is will Michael Dell do it? If he doesn't then Michael Dell will be remembered for not being investor friendly.

    Disclosure: I am long DELL.

    Additional disclosure: The information from Investment Maxim, have no regard to the specific investment objectives, financial situation, or particular needs of any visitor. Users should not regard it as a substitute for the exercise of their own judgment. Investment Maxim, officers, associates or clients may have an interest in the securities or derivatives which the Investment Maxim stock Valuation tools provide or recommend. Users should consult a certified financial advisor before making any stock related investments. Investment Maxim accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part from Investment Maxim or any of the tools containing the name Investment Maxim. Recipient of this report agrees not reproduce or distribute this report in any form, physically or electronically.

    Tags: DELL
    Jan 22 10:17 AM | Link | Comment!
  • Computer Sciences Corporation A Great Value Bet

    Computer Sciences Corporation (Ticker:CSC) a global IT services company operating in 90 countries has been able to sustain revenues of $16 billion despite the economic slowdown for the past 3 years. Strong cash flows in these past 3 years have resulted in investments in technology, new acquisitions and reduction in debt. CSC's balance sheet continues to show strength and the financial ratios continue to improve.

    Going forward the following will be the key growth drivers for the company:

    1. Cloud computing: The company has won significant cloud engagements with Amp, Tryg and State of California.

    2. Health care: The company has won multiple public-sector healthcare contracts and continued to deliver health information systems projects for the governments of the UK, Denmark, the Netherlands and the State of New York.

    3. Cyber security : Significant wins in this area has been of an important engagement with the U.S. Air Force to provide cyber security to the 24th Air Force Cyber Command

    4. Financial Services: New contracts with UbS and CSC rISKmASter® claims management software and Celeriti™ banking and cards management software will continue to drive growth.

    Value Parameters:

    1. Price / Avg Free Cash flow stands at an astonishing 2.55 which means you could theoretically buy the company and break even in 3 years.

    2. The current P/S ratio stands at a 0.37 compared to a 5 year historical high of 1.15

    3. The stock meets David Dreman's contrarian investment strategy. His strategy involves picking stocks which have P/E of less than 10, P/B of less than 3 and Price/FreeCashFlow of less than 15

    4. The stock also meets Geraldine Weiss Investment strategy, wherein the dividend yield is at a 5 year high

    Technical Parameters:

    The stock has been trading below its 30 day moving average. This gives investors a great price at which they can start accumulating. The stock has also seen a spurt in buying with volumes crossing 5 times its average volume in the recent past.

    Given the above factors, we feel Computer Sciences Corporation (Ticker:CSC) is a great value bet at current price of $28-30 and has the potential to appreciate by 30-40% in the medium to long term.

    Apr 06 4:53 AM | Link | Comment!
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