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Dell: Here's Your Winner

By Alex Dumortier, CFA - Apr 19, 2013 at 7:16PM

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The PC maker is priced to go.

U.S. stocks finished a challenging week on a high note, with the S&P 500 (^GSPC 1.18%) and the Dow Jones Industrial Average (^DJI 1.45%) gaining 0.9% and 0.1%, respectively, on Friday. The discrepancy in performance between the two was largely due to IBM's heavy weighting in the price-weighted Dow. On the week, the S&P 500 lost 2.1% -- its weekly loss since November.

Consistent with the S&P 500's daily gain, however, the VIX Index (^VIX 0.24%), Wall Street's fear gauge, fell 15%, to close just below 15. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)

Dell: Wrap it up. It's priced to go
Shares of PC and devices manufacturer Dell (DELL.DL) closed below Silver Lake Partners and Michael Dell's $13.65-per-share acquisition offer this afternoon. The catalyst for the decline was the news that a consortium led by private equity heavyweight Blackstone is withdrawing from the contest, unwilling to pursue its preliminary offer of at least $14.25. The situation is starting to look like a classic merger arbitrage in which shares typically trade at a discount to the offer price, which discount reflects the uncertainty pertaining to the completion and timing of the transaction.

In theory, activist investor Carl Icahn is still in the running (he's made a preliminary offer of $15 for 58% of the company). Earlier this week, he even negotiated with Dell's board the ability to engage with other investors on the matter in exchange for a promise that he will not increase his current shareholding beyond 10% -- but this smacks more of Icahn's old greenmail tactics than a considered interest in the company.

How will this play out? Going by today's closing price, the consensus view now appears to be that Silver Lake Partners and Michael Dell will ultimately be successful in taking the company private at their current offer price. If that does come to pass, it looks like they will have been marvelously opportunistic, sweeping the company away at a fire-sale price. On the other hand, in light of the latest data on PC shipments, they're probably wise to require a considerable margin of safety.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$31,714.81 (1.45%) $450.73
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$3,947.35 (1.18%) $45.99
Dell Technologies Inc. Stock Quote
Dell Technologies Inc.
DELL.DL
CBOE S&P 500 Volatility Index Stock Quote
CBOE S&P 500 Volatility Index
^VIX
$29.50 (0.24%) $0.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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