Thursday, March 28, 2013

Multiple Bids for Dell, but Not a Bidding War

Multiple Bids for Dell, but Not a Bidding War

According to The Wall Street Journal[1] and The Financial Times[2], Dell is about to experience a bidding war as Blackstone and Carl Icahn compete with Michael Dell to acquire the company.  I may wind up getting this situation completely wrong, but I’m not expecting a bidding war.  While this additional interest is likely to force Mr. Dell to increase his price from $13.65 to a higher figure, Dell is highly unlikely to turn into a frenzied series of offers and counteroffers. 
Questions (2002)
In my view, there are three major constraints to anyone paying much above $15 per share.  First, Dell’s core businesses haven’t been growing much in the past several quarters.  Thus, anyone acquiring the company cannot rely on organic growth to finance a substantially higher bid.  We’re dealing with a challenged company in an industry that has seen dozens of companies lose their competitive position and fail to regain their footing.  Before Mr. Dell made his initial bid, fear ruled and the company’s stock traded below $9 per share.  Now there’s an element of greed as investors suggest that Dell is worth substantially more than Mr. Dell’s proposal.

Second, the banks will have a lot to say about how much any one of the potential buyers will be able to offer for Dell’s stock.  The major banks have had a close look at Mr. Dell’s and Silver Lake’s original proposal as well as Blackstone’s recent offer, which appears to be worth a bit more than $14.00 per share. Any bidding war is going to be constrained by the banks’ unwillingness to lend more to finance any deal.  It’s not surprising that the Blackstone’s proposal leaves a portion of Dell in public hands.  Blackstone’s only way to achieve a higher price and placate Southeastern Asset Management, Dell’s largest shareholder, was to create a stub.

Third, none of the interested parties are strategic buyers.  If one of Dell’s competitors were to have entered the fray, then perhaps they could have justified a substantially higher price based on potential synergies and cost savings from combining the companies.  However, in this instance, we’re looking at three financial buyers.  The strategic acquirers decided to pass on Dell.

According to press reports, Mr. Icahn’s proposal offers $15 per share for 58% of the company.  In the end,  I don’t expect Dell’s board to opt for Mr. Icahn’s proposal because it doesn’t address Dell’s strategic issues.  I’d expect Mr. Icahn to remain a factor in trying to push up the price.   He’ll be a potential source of litigation if he feels slighted by the acquisition process.

There are undoubtedly numerous possible permutations to the Dell saga.  I’m betting that Mr. Dell, Silver Lake, and Blackstone, as well as its partners, Francisco Partners and Insight Venture Management, will eventually join forces.  Even at Mr. Dell’s original price, this is a large deal ($24 billion).    I bet all the private equity sponsors will be glad to spread the risk across more parties.  After a great deal of posturing, this will become a typical manager-led club deal.

Unfortunately, the acquisition process will take time, which isn’t great for a company facing significant strategic challenges.  Dell’s special committee must first explore and flesh out the Blackstone and Icahn proposals.  Then Mr. Dell has to be given an opportunity to match or exceed their proposals.  In due course, Mr. Dell and Blackstone will get together and the company will be taken private. 

By the time all of this is resolved, it’s going to be summer in Round Rock, Texas, and Mr. Dell won’t just be sweating because of the heat.  Turning around Dell isn’t going to come easy.  Being a private company isn’t the magic elixir.

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