If you're Michael Dell, you contend you're doing shareholders of your company a favor. If you're an investor in Dell (DELL), you may well feel like you're getting low-balled.
Dell's largest outside investor, Memphis-based Southeastern Asset Management, agrees with the latter position, saying it won't support the $13.65-a-share management-led buyout of the computer seller. Dell responded to that announcement by arguing that the plan to take the company private "offers an attractive and immediate premium for stockholders and shifts the risks facing the business to the buyer group." Southeastern doesn't remotely believe that.
It's problem isn't with an acquisition. It's that the firm thinks the takeover price needs to be substantially higher, about $10 a share higher, in fact. By the money manager's calculations, Dell is worth $23.72 a share.
The last time Dell, of Round Rock, Texas, traded there was six years ago, in February 2007. It's not been above $20 since 2008, and in the last 52 weeks, it has a range of $8.69 to $18.36. Markets can be wrong on a price, but in the case of Dell, it's been a years-long undervaluing if Southeastern is correct. The traders in Dell Monday aren't giving the impression that they expect a substantially improved price to be coming, even if they think it should. Recently, the stock was at $13.66, up 3 cents on the session, and a penny above the purchase proposal.
None of this is to say Southeastern doesn't have a point. It's doing what it should do as a firm that runs money for clients and has an 8.5% stake in Dell, including stock options. Southeastern sent Dell's board a letter noting its "extreme disappointment regarding the proposed go-private transaction, which we believe grossly undervalues" the company's stock. As a result, the firm said it won't vote in favor of the plan, which in addition to Michael Dell includes investment firm Silver Lake and a loan from Microsoft (MSFT), as it stands currently.
In a move that will be cheered by Dell's long-time investors of all sizes who are hoping for a higher price, Southeastern said the offer "appears to be an effort to acquire Dell at a substantial discount to intrinsic value at the expense of public shareholders."
Timing issues potentially could strengthen that view. According to last week's press release detailing the plan, Michael Dell first brought the idea to the board in August. During that month, Dell's average close was $11.57. In July, it averaged $11.93. In total, the shares ended trading between $10.42 and $12.48 over that two-month stretch. A look at Dell's chart shows how the stock was behaving leading up to the founder's approach, so he did make his move during the downward part of its path.
His response could be that the shares kept slumping, falling all the way under $9 in November before starting to recover. Even so, that probably wouldn't be the kind of stirring defense many share owners would find persuasive. Clearly, Southeastern doesn't.
Why is Southeastern so adamant about the value it sees? For starters, it's been a Dell holder for years and it knows the company extremely well. More importantly, it has bought shares in many cases at prices well above the proposed privatization. The Wall Street Journal quoted estimates from market data firm Ipreo figuring that Southeastern's cost basis for its Dell stake is $24.58 a share, tops for any of the 25 biggest investors. The average purchase price for that group of large shareholders was $16.11, the report said. That's more in line with the $15 to $16 range The New York Post had reported might be in the making before the actual bid appeared. Yahoo Finance's model produced an implied price of $13.60, which doesn't factor in a merger premium.
Of the top 20 Dell holders, a slight majority have trimmed their stakes in months past, including Southeastern by 7.8 million shares, while notably not agitating for major change that may set free some of that ostensible value -- 11 of them were net sellers in the most recent reporting periods covered on FactSet. (Southeastern continues to hold 122.3 million shares, FactSet shows.) However, large buys were also in effect. All told, the 20 biggest investors had a net increase of right at 25 million Dell shares, based on the latest data. Because of filing rules that allow several weeks before updated numbers are available, these are based on reports as of Sept. 30, 2012, and Dec. 31, 2012.
Sizable sellers included Mackenzie Financial Corp., Pzena Investment Management and Templeton Global Advisors. The buying side was led by Yacktman Asset Management, which built a 14.9 million-share position. No. 2 outside holder T. Rowe Price followed by adding 10.3 million shares. Schroder Investment Management increased its stake by 9.8 million shares, and Harris Associates purchased 8.7 million shares.
There's no guarantee Southeastern will get its way, though note that it's used its influence successfully before. Last year, its giant stake in Chesapeake Energy (CHK) helped lead a board restructuring in the wake of reports raising questions about some of CEO Aubrey McClendon's financial arrangements.
Dell says the special committee of the board "considered an array of strategic alternatives" before settling on the Michael Dell / Silver Lake plan. That isn't going to make years-long investors happy unless a few extra dollars are put in to sweeten the transaction. Worth remembering is that holders do get a 45-day window to find something better.
A week of that is gone. If nothing else comes along that's more enticing, enough outside investors theoretically may follow Southeastern and scuttle the buyout. Then they just have to hope they don't end up back in the single digits, where Dell has shown it's very capable of trading.