Let's time-travel back to Jan. 1. If I would have told you that almost two months into the new year that shares of Dell (UNKNOWN:DELL.DL), which is up 40%, would be outperforming Apple, which is down 13%, you would have thought that I was crazy. One would think that Dell's PC business, which still comprises of 70% of its revenue, has figured out a way to mount a recovery against mobile devices. But that's not it.
Instead, the company has gone private or "underground." But why does this matter? Regardless of how it's spun, this is still the same company that has lost more than 40% of its value over the past five years. Its core business has been eaten alive as tablets and smartphones have grown in popularity. And, adding insult to injury, Dell's proud OEM partner Microsoft (NASDAQ:MSFT) recently decided to enter the realm of hardware by building its own Surface tablet -- essentially saying it's now every man for himself.
So, does privatization make a difference for Dell? Said more plainly, is Dell any more valuable today than it was one month ago or a year ago -- at least to Michael Dell himself, Silver Lake Partners, and other private investors? They seem to think so. The final price is said to be $13.65 per share, which values the deal at $24.4 billion. While the cynic in me doesn't believe privatization will make much of a difference fundamentally, I'm nonetheless willing to give Dell credit for (at least) doing right by its faithful shareholders.
Aside from putting an end to investors' suffering, Dell is gift-wrapping a 25% premium. And if you consider the stock's average closing price being roughly $10 over the past 90 days, the premium then approaches almost 40%. It's hard to complain about that, although some will. Then again, it will be a surprise if a rash of lawsuits don't follow, especially given that just a year ago the stock was trading at $18.
That said, the board has an out, or what is called a "go-shop" provision that it can exercise within the first 45 days. This means if someone comes up with a better offer, the board has an option or an obligation to listen. But it goes back to my question above: What's the underlying value of this company? Given the dynamics of the market and Dell's inability to find its place in the post-dot-com bubble, why does it deserve a higher premium?
Dell's value is too heavily predicated on PC sales, a business that's been bleeding revenue for years. Even Lenovo, which has grown profits and revenue by 34% and 12%, respectively, still struggles to shed a negative PC bias among investors. Despite its 34% profit growth, which is outperforming Google, shares of Lenovo trade at a ratio that presumes underperforming growth.
So how then, can Dell realistically command a higher premium than what shareholders are already getting? Should we point out Hewlett-Packard's (NYSE:HPQ) valuation, since it's still No. 1 in worldwide PC sales? But that's not how valuation works. Nonetheless, Michael Dell and Silver Lake Partners believe they can harvest more value as an underground company. From the press release, Michael Dell was quoted as saying: "I believe this transaction will open an exciting new chapter for Dell, our customers and team members. Dell has made solid progress executing this strategy over the past four years, but we recognize that it will still take more time, investment and patience, and I believe our efforts will be better supported by partnering with Silver Lake in our shared vision."
This tells me that Dell is desperate for time and it knows investors have lost patience. Going private will do two things: shield Dell from scrutiny and give the company the latitude to execute without certain disclosure requirements. That's all well and good. But it fails to address the underlying problems of its core business. What do Michael Dell and Silver Lake see that the rest of the market does not?
Apple and Google are kings of the hill. As a private entity, Dell can now choose to form a partnership with one or both. It would make sense given they both offer operating systems. Plus, Dell could lessen its Windows dependency, which is probably why Microsoft felt it had to make an investment in Dell. Is Microsoft suddenly afraid that Dell would venture to the "dark side" once it goes underground?
It's also worth asking, who's next? The clock is now ticking on HP.