I've always said investing takes a blend of skill and luck. Luck definitely shone in my favor in November when I picked up shares of PC-maker Dell (UNKNOWN:DELL.DL) the day after it reported third-quarter results that had Wall Street running for the hills.
In that report, investors saw a company that was in the midst of a very long transformation that was going to struggle with declining PC-sales as it pushed into information technology. What I saw was a company capable of producing billions in annual cash flow that already boasted a large net cash position, and that could be a potential takeover target. Little did I know how lucky I would be, because a few months later that takeover chatter would become a reality.
The initial deal offered by Silver Lake Partners for $13.65 per share didn't sit too well with Dell's largest shareholders -- Southeastern Asset Management and T. Rowe Price Group (NASDAQ:TROW), which together own 12.9% of all outstanding shares -- and prompted activist investor Carl Icahn to make a sizable investment that led to the confidential opening of Dell's books. Large shareholders criticized the deal for valuing Dell too cheaply with Icahn originally demanding Dell go into debt to pay out a $9 special dividend if the deal fell through. That all changed on Friday.
With three bids effectively on the table now -- $13.65 from Silver Lake Partners, a minimum $14.25 per share offer from Blackstone Group (NYSE:BX), and an offer from Carl Icahn and Icahn Enterprises (NASDAQ:IEP) to purchase 58% of outstanding shares at $15 -- things are about to get interesting. When all is said and done, one deal stands out to me, a Dell shareholder, as a clear winner.
Why the Silver Lake deal is yesterday's news
The Silver Lake deal is essentially dead after these two competing bids emerged on Friday. Unless Silver Lake wishes to boost its bid -- which could be more difficult now that Dell lowered its fiscal profit down to $3 billion for the year -- or Michael Dell wants to dig more deeply into his own pockets (which seems very unlikely given that he was already utilizing his 16% stake in the company to finance the deal), then it's as good as dead.
I think Icahn? Actually, I think not...
Carl Icahn's deal is intriguing from a shareholder perspective as it, on paper, appears to net the highest dollar amount per share, although we don't yet know how high the Blackstone Group bid is willing to go. However, Carl Icahn's bid will only be for 58% of the company, exposing the remaining 42% to the public effects of a reduced earnings forecast and a discerning public eye that has been displeased with the pace of Dell's turnaround.
This is the deal that makes sense
As a Dell shareholder, the Blackstone offer makes the most sense of all -- and I feel shareholders would be foolish not to accept. Although we don't know the full details yet -- for example, whether or not Blackstone would purchase all existing shares, or roll a portion back into a public offering -- Blackstone's offer has a number of notable positives.
To begin with, the deal makes no mention of Michael Dell running the private or partially public company. Instead, rumors have been that Blackstone would favor bringing in former Hewlett-Packard (NYSE:HPQ) CEO Mark Hurd to replace Michael Dell. Although one can easily question Hurd's ethical conduct, given that he was fired from HP for "violations of HP's standards of business conduct," there's little denying that when he helmed HP, all of its metrics moved up. Hurd is the kind of turnaround specialist that Dell needs.
Also, I feel Blackstone offers the smartest plan to raise financing and pay for the deal. By selling off the non-core assets of Dell's business, such as the rumored sale of Dell Financial to General Electric as reported by Bloomberg, Blackstone could separate out the components of Dell it wants and minimize its actual out-of-pocket costs. Working with Morgan Stanley, Blackstone should have no trouble coming up with financing, either, whereas Silver Lake simply doesn't have the funds available to boost its bid dramatically from current levels.
The next few days will be important as Dell fully discloses the details of each bid and we could potentially hear from its board -- and Michael Dell himself -- as to which bid the company might be leaning toward. As for me, I've all but declared Blackstone the superior bid. Now, I can only hope other Dell shareholders agree with my assessment.