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Dell Protesters Are Protecting Their Jobs, Not Investors: Munson


Since January 1st shares of Dell (DELL) have risen more than 40% driven by founder & CEO Michael Dell's $24.4 billion buyout offer. The $13.65 per share bid was a 25% premium to the price of the shares prior to word of the transaction leaking on January 11th. In order to fund the deal Mr. Dell was using his 14% stake in the company and chipping in his own cash along with funding from Silver Lake Partners and Microsoft (MSFT).

The move was just the latest in a long line of efforts by Dell to prop up its stock price. Among the value creating efforts were $39 billion in buybacks since 2007 and the announcement of the company's first dividend last June. How did those strategies work? Dell's costs basis on the repurchased shares is $19 and the stock had fallen 10% between the dividend announcement and Mr. Dell's bid.

Naturally shareholders reacted to the proposed bailout of their losing positions like whiny, litigious children. Southeastern Asset Management, which owns 8.5% of Dell, almost immediately launched a PR campaign arguing shares were worth just under $24. In the note in which Southeastern laid out its tortured valuation model, the firm said it "intends to retain and avail itself of all options at its disposal to oppose the announced transaction, including, but not limited to a proxy fight, litigation claims and any available."

Lee Munson, chief investment officer of Portfolio LLC and author of Rigged Money, says you have to consider the source. Southeastern's founder Mason Hawkins' Longleaf Partners Fund (LLPFX) has had a one-star Morningstar rating for the last 5 and 10-year periods and overall. Painting with a broad brush, Munson says Southeastern is just an example of a collection of value fund managers who have ended up as "bag holders" for companies such as Dell. Southeastern reportedly accumulated its Dell shares for prices between $19.91 and $41.54.

The Dell board set up a competitive bidding process that has resulted in offers from Blackstone (BX) and Carl Icahn, or some mix of the two that could add as much as 10% more than what Mr. Dell offered. Claiming Dell is worth somewhere over $20 is fine, but the free market begs to differ.

In just over 2 months Michael Dell and his Board have conjured up $8.8 billion in value for a mediocre company in the dying PC industry. Shareholders should be carrying Mr. Dell around his offices like the coach of a winning Super Bowl team. Instead he's being accused of trying to steal a company he offered to buy for $24 billion.

Munson argues that the whole mess is simply a matter of fund managers "trying to justify why they held on to a losing position for all these years."

Considering where Dell was trading when the stock wasn't in play, it's hard not to wonder if the protestors are looking out for shareholder interests or playing a high-stakes game of CYA.