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# Dell Computer Corporation (DELL) Message Board

• eurotyle eurotyle Feb 2, 2013 3:45 PM Flag

## Something wrong with the math here?

I've been watching this buyout unfold very closely over the past couple of weeks.

With that said, many sources are citing that Microsoft is willing to invest \$3 billion into the privatization of DELL. The UK/domestic banks willing to finance the deal have announced \$15 billion guaranteed loan.

Reuters is reporting a deal around \$13-\$14.
Barrons and Forbes are throwing around \$15-\$16.

Sources are reporting that Microsoft \$3 billion dollar stake are going to give Microsoft 10% control of the company.

According to NASD, DELL has roughly 1.7 billion shares outstanding.

Now if Microsoft receives a 10% stake for \$3 billion, doesn't that equal the equivalent of a \$30 billion dollar deal in order to go private. Simple math right?

\$30 billion / 1.7 billion shares = \$17.64 share offer on the table?

I personally think \$17.64 is a tad high per share, however why throw Microsoft 10% of the company for \$3 billion? A 10% stake for \$2 billion would only be a \$20 billion dollar deal or simply \$11.76 a share.

I think if you take the \$17.64 + \$11.76 (high/low spectrum), we would probably arrive at the median price of \$14.70 for a final price.

Many sources are throwing around Microsoft's expected 10% stake, however the numercial amounts are ranging from \$2-3 billion investment.

Thoughts?

Sentiment: Hold

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• In addition if you take the median of Reuters range (\$13-14) you arrive at \$13.50.

If you take the median of Barrons/Forbes (\$15-16) then you arrive at \$15.50.

The median of these numbers equates to \$14.50, which is pretty much on par with my \$14.70 price expectation mentioned above.

I bet it will fall within this range. I guess we'll wait and see.

This is what my basic math and math that the news reports are predicting.

It cannot be too far off.

Sentiment: Hold

• This is all speculation. But anyways -

I don't believe taking reported media averages of pps buyout values is a reasonable strategy though I will acknowledge that they do set up expectations and do have perceived consequences if they aren't met. The key as you allude to, is to provide some comfort for those shareholders who bought high and mitigate lawsuits and bad press. But I am not persuaded in the merit of using those guestimates as a basis - they serve better in spiking interest in share purchaser and in generating expectations of 'fair' valuation among a minority of shareholders (those you ID as having bought above \$13).

Your valuation based on the MSFT investment is more convincing. I don't think MSFT will throw in \$3B because if it is to have a 10% stake, it seems a \$30B deal is over-the-top and based on float shares would amount to a pps of almost \$20 and I have not heard of any credible estimate that high.

I think the most realistic and actuarial basis for starting with an estimate of pps buyout would be to consult the discounted cash flow model reported in the WSJ which results in an implied equity value of 13.60 a share. I think that is the lowest basis and believe any 'fiduciary premium' (FP) would be added to that. In the absence of a FP, the deal will be done for 13.60 per share and there will be considerable threats to litigate the process as well as much bad press - both of which are worth money to avoid. It would be a pretty negative legacy for Michael Dell to cash out shareholders at a pps that reflects the deflating effect of poor management for the last decade.

So I do think though that shareholder compensation will likely reflect a 'fiduciary premium' and the question is really how much is that premium and where does the money for it come from? I think M. Dell and insiders who retain their interest in the new private Dell will not be having their shares purchased. After all, they will keep their original shares, and why not? The other equity investors will have shares commensurate with M. Dell's retaining majority control, so his 16% has to somehow become 51%.

And I think that 16% is a very interesting number. It might reflect the FP for Dell shareholders. Simple, it is \$13.60 + FP of 16% = \$15.80.

In other posts I also offered alternative back of the envelope methods of 'guestimating' the buyout pps but as of this writing I think \$15.80 is my favored estimate, with the most likely range being 15.50-16.50 - allowing the FP to range from 12% - 20%.

• 2 Replies to ae_savant
• Savant,

I understand what you're referring to however as an FYI remember 70% of all DELL shares held by investment banks/funds were acquired for less than \$13.

Only 30% of all shares were acquired above \$13.

It's hard to tell exacts, but what if, and it's simply a what if half of that 30% were bought between \$13.01 to \$14.99?

Throw in Michael Dell's 16% stake and your clearly going to green light a deal at any price really. Most would be undeniably tendered. Retail only owns 8% of all shares. I imagine probably 50-60% of these shares are much higher than \$15 per share.

The patient longs who bought higher will be the only losers here.

It's either do a deal and cash out for slightly more than you had the day/week/month before or watch this falter back to sub-\$9, then have someone like Oracle swoop in and pay a measly \$12/a share (at which point would be a 25-30% premium.

Would you take the lesser premium now or the higher premium later?

I'll take a 10% fiduciary premium while we at \$13.62 rather than a 30% fiduciary premium when we're trading around \$9.

Sentiment: Hold

• So sorri, looks like Ron wallace jinxed this deal and it will be \$13.50......

It is done........

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