Dell: Deal or no deal?
Shares of Dell (UNKNOWN: DELL.DL ) shot up 13% today, after Bloomberg News reported that the PC manufacturer is in talks with at least two leveraged buyout (LBO) firms about going private.
It's little wonder this report had such a palliative effect on the stock: Long-term Dell (UNKNOWN: DELL.DL ) shareholders have suffered a martyrdom. Even after today's pop, the stock has left them with a 53% loss over the past 10 years -- and that figure is inclusive of dividends. Over the same period, the S&P 500's total return was 93%. Last year alone, the stock lost 30% of its value.
Technology is not a popular choice for buyouts. LBO firms prefer industries that are less vulnerable to disruptive change -- dependable cash flows are a prerequisite to service the debt load a company takes on in a leveraged buyout. It's no coincidence that the targets in two of three largest technology LBOs -- the 2005 acquisition of SunGard Data Systems (equity value: $11.8 billion) and the 2007 acquisition of First Data ($26.4 billion) -- were business services firms, with solidly entrenched franchises. The deal that completes the trio, the 2006 acquisition of Freescale Semiconductor ($17.6 billion) was purely a product of the credit/LBO bubble and wouldn't stand a chance of finding financing today. (It would be hard enough to do the others.)
With a $21.3 billion market capitalization, a Dell buyout raises the same issue. Furthermore, an LBO investor can't simply dump shares on the open market when he or she wishes to sell -- the question of the exit is paramount. There is no obvious trade buyer for Dell, and it would take a herculean effort (and no small amount of luck) to put together a successful public offering.
In December 2011, activist value investor Bill Ackman told an audience, in regard to Hewlett-Packard:
We try to find a business that we can predict what it will look like over a very long period of time. The problem is that HP is in a number of businesses where I think it's very difficult to predict what the business is going to look like five years from now, let alone over the many, many years of a discounted cash flow calculation you need to figure out what the business is worth. So the problem we've had is it looks cheap, but the future of the PC industry is a very, very difficult business to handicap and incredibly competitive.
Replace "HP" with "Dell," and everything he said remains true. As such, betting on an LBO to recoup a loss or to earn a return looks entirely speculative; such a deal is unlikely to get very far on the assembly line.
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