Sunday, June 16, 2024

Dell’s Dilemma

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You have to feel for Michael Dell. He is trying to buy back his company so he can restructure it for the future, and corporate raiders have moved to derail his plan.

Last week he had to up his offer by $150M just to buy off a corporate raider and his cronies. He offered a fair price for his company as validated by several independent review firms. All of those firms basically concluded that a turnaround has risk and the Dell bid doesn’t reflect that risk, so it’s a good deal for stockholders.

You can see the valuation of Dell drops whenever the effort is at risk, so you know the market values the company at a lower price—perhaps as low as HP’s multiple, which would be round $8 a share, far below the bid at $13+.

This reminds me of times when I’ve bought something from an inexperienced seller. I offer fair market price for what they are selling, and they say the object is worth far more but can’t understand why no one will pay that higher price. They don’t get that something is only worth what someone else will pay for it. The value isn’t tied to what the owner wants for it, unless that amount is at or below what someone else wants to pay.

At this point, Michael Dell is effectively bidding against himself and a magical number a few large investors hope to get. His dilemma is this: does he pay what is basically blackmail to assure the can execute a turnaround, or does he effectively say “If you think the company is worth this, find someone else that will pay it.” 

If you think about it, most of Michael Dell’s vast wealth is tied up in the company. Getting a check far higher than what he and the analyst firms think the company is worth would be a huge profit for him. Let’s explore that.

Remembering Microsoft/Yahoo

You might remember Microsoft’s attempt to buy Yahoo. They bid well over what the company was worth,and the board in that instance argued it was worth still more. Microsoft took a massive stock valuation hit, even though their bid was rejected, and never really recovered. The deal didn’t happen, and Yahoo stock fell off a cliff to unheard of lows, wiping billions in valuation off the market in what seemed like a heartbeat.

Now it wasn’t that Yahoo wasn’t willing to sell—it was that some on the board got greedy and wrongly assumed that Microsoft would pay any price. Carl Icahn got involved late in this deal and tried to make the Microsoft investment work. But Microsoft effectively said “thanks but no thanks” after being burned. Instead they licensed Bing to Yahoo and entered into a more lucrative and less risky revenue-share agreement.

Of course, at the time I thought it ironic because It didn’t look like Yahoo would fix any of Microsoft’s issues, most of which had to do with the company being too complex already. It was clear the Yahoo board wanted to sell the company, so the sides seemed reversed. The Yahoo board should have been trying to get this deal done, and Microsoft should have been running for the hills with their hands solidly on their wallets.

Based on the Microsoft example, maybe Michael Dell should walk away. But could he?

Could Dell Walk Away?

Actually he could; he has several alternative options.

One, he can do a reorganization/turnaround while public. Most are done this way, and Dell’s attempt to go private is far more the exception than the rule—likely because it appears to be such a pain to go private. The whole point is to speed up the process and remove much of the pressure to assure the result.

But at some point he and his team could just move to plan B. The stock would drop sharply. They could put in place a long term plan for Microsoft and others to buy it up slowly at a much lower price, and then, if they wanted, they could reattempt this in the future or get even more creative.

One of the ways they could get more creative is to form a wholly owned subsidiary with Microsoft, like EMC did with GE and Pivotal. This would show up as an investment on Dell’s books, but it would be private in all other ways. Dell might even personally fund it, though avoiding conflict of interest problems would be more difficult. He could make this the hub of the new Dell, transferring the parts he needs into the entity and funding the effort with Dell’s reserves and the money from the investment partners as a closely held company.

At some future point they could even take the company public on its own and create something like EMC has with VMware or 3Com did with Palm at its peak. Recall that in that last instance Palm’s valuation exceeded 3Com’s significantly.

They could do this without a shareholder vote. And the investment groups currently effectively blackmailing Dell would see both their assets and influence dwindle rather sharply ,which, I think, would at this point provide a strong incentive for the Dell team, likely very tired of the interference and strong arm tactics they’ve had to face.

Wrapping Up: Next Steps

It looks like Michal Dell and their partners are going to make one more run at this effort in early August. But if it doesn’t work, expect them to start to get creative.

While all of this will impact Dell’s ability to execute a turnaround, it has little impact on the day-to-day operations, other than some concerns surrounding employee stock value and retirement. The employees trust Michael Dell, and most are likely to ride through this because they believe he will prevail. However, I think he is getting more than aggravated about the process and expect that if it doesn’t end soon, he will likely come up with a creative way to make Carl Icahn and the other investors causing him grief pay for the privilege. That could be epic and worth watching.

Dell’s Dilemma becomes does he continue to try to find the magical price that will get these investors off his back or let the Dell stock price fall back to where the company is truly valued by investors, coincidentally making the folks annoying him now look really stupid. If I were him, I’d already be on that second path.

It is turning out to be a rather fascinating summer.

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