Shares of Dell (NASDAQ: DELL ) fell as low as $12.71 on Friday, even as founder Michael Dell's proposal to buy the company for $13.65 goes before shareholders two weeks from now. At first glance, Dell might seem like a no-brainer "buy" candidate (invest $12.71 now, get $13.65 after the proxy vote on July 18).
However, this is far from being the whole story. An activist campaign led by Carl Icahn's Icahn Enterprises (NASDAQ: IEP ) investment fund has made Dell perhaps the riskiest stock in the market. Icahn believes that Michael Dell's proposal to buy the company significantly undervalues Dell. Yet while Icahn probably has the heft (and the votes) to scuttle Dell's go-private deal, he is unlikely to garner enough support to implement his proposal to increase shareholder value through a $14 tender offer.
The results are likely to be very disappointing for Dell shareholders. If this "clash of the titans" between Dell and Icahn ends in a stalemate, the company will find itself without a clear strategic direction and its valuation could revert to a much lower multiple, in keeping with Dell's uncertain prospects.
1. Dell-Silver Lake buyout on the rocks
Investors can debate whether the $13.65 buyout offer from Michael Dell and hedge fund Silver Lake Partners recognizes the "full" value of Dell. However, one thing cannot be disputed: Until Michael Dell and Silver Lake came along with a proposal to take the company private, Dell stock was worth much less, bottoming below $9 in late 2012.
The rapid rise in Dell's stock price in early 2013 was a direct result of the buyout offer. Indeed, as Dell's "Special Committee" pointed out in a shareholder presentation released Friday, the PC industry outlook has been revised lower numerous times in the past year. Company fundamentals have also suffered, lagging those of competitors like Hewlett-Packard (NYSE: HPQ ) .
This hasn't stopped Icahn from making the rounds on TV to tell anybody who will listen that Dell is worth far more than $13.65. Yet as the Wall Street Journal recently noted, Icahn has not offered to buy the company at any price; he wants Dell to fund a $14 tender offer with the company's cash on hand and new debt.
In late 2012, when Dell shares were mired below $10, most shareholders would have taken $13.65 in a heartbeat. Icahn's muckraking has clouded the waters; many shareholders now seem unwilling to sell at that price. Indeed, the Special Committee of Dell's board recently advised Michael Dell and Silver Lake to raise their bid in order to improve their chances of winning the upcoming shareholder vote. However, according to a Bloomberg report on Friday, Dell and Silver Lake will not budge.
2. Icahn's tender offer: a long shot
Shareholders voting against the Dell-Silver Lake buyout offer are probably doing so because they have been convinced that Icahn's tender offer plan would offer more value. However, investors need to understand that even if the Dell-Silver Lake buyout is rejected, Icahn's plan has a very low probability of being implemented.
The problem is that Michael Dell owns approximately 16% of the company. While he has to remain "neutral" in the buyout vote, he can vote as he pleases if the buyout offer fails. This means that while Icahn only needs to muster 42% of the shareholder vote to scuttle the buyout offer, he needs a full 50% to elect his slate of directors and proceed with his recapitalization plan.
According to AllThingsD, there is a good chance that the buyout will fail but Icahn will also fail to gain control of the company, leaving the company in no-man's-land. It has been very clear from the recent verbal sparring in the press that Icahn and Michael Dell have very different ideas about how to turn the company around. If the two sides are forced to share control of the company, prolonged bickering seems more likely than concerted action.
Foolish bottom line
If the "deadlock" scenario emerges, where neither Michael Dell nor Carl Icahn can take full control of the company, Dell stock could plummet. Dell's special committee noted in its recent presentation that if Dell were to trade for the same earnings multiple as HP, shares would be worth just $5.85-$8.67 across a range of plausible scenarios.
Dell shares are trading at a significant discount to Michael Dell's buyout offer ($13.65) and Carl Icahn's proposed tender offer ($14) for good reason. Shareholders are so closely divided that it is very possible that both proposals will fail. Even if you are willing to sell your Dell stock for $13.65 and Michael Dell wants to buy your stock for $13.65, you'll only be able to sell at that price if enough other shareholders are of the same mind.
While virtually every shareholder favors either Dell's plan or Icahn's plan over the status-quo, the two sides may be reaching a deadlock that keeps the status-quo intact by default. Ordinary shareholders are just pawns in this high-stakes game. The growing likelihood of stalemate makes Dell an incredibly risky stock for investors -- one that should probably be avoided.
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