On Thursday, Dell’s (DELL) board of directors delayed the vote that would have taken the company private under Michael Dell’s leadership. Dell’s group—which planned to pay $13.65 per share to existing investors—lacked the votes to seal the deal.
A rival investor group—led by legendary corporate raider Carl Icahn—proposes to keep the company publically traded though with a much smaller share count. Icahn proposes buying back 1.1 billion of the company’s 1.8 billion shares outstanding at $14.00 per share, with the addition of warrants.
So, is there a trade here?
Maybe. But probably not on the long side.
THE DEAL
Let’s take a look at the numbers. If Michael Dell’s original offer is accepted next week, investors would pocket a modest 4% return from today’s price; not a high enough return to get excited. And if Dell raises his offer to match Icahn’s—something he has not indicated he intends to do—you’d be looking at a return in the ballpark of 6%. Again, nothing to get excited about.
So, if you are long Dell right now, you have to be expecting one of two outcomes:
1. Michael Dell significantly raises his offer—again, something he has given no indication of doing.
2. Carl Icahn’s bid is successful, you reject the tender offer and keep your shares, and the new, highly-leveraged Dell shoots sharply higher.
A LITTLE BLUFFING?
Michael Dell is playing a good game of poker here, and he may well end up raising his offer price. But he could just as easily say “take it or leave it.” I don’t want to put money at risk based on what Dell may or may not do.
And Icahn? I put the probability of success for his plan at virtually nil. Icahn and his allies at Southeastern Asset Management are collectively the second biggest shareholder block after Michael Dell himself. But they lack the numbers to outvote Dell, and even if they did, they would have a hard time getting enough investors comfortable with the debt involved. Icahn’s plan would roughly triple Dell’s debt…and this is a company that is struggling to turn itself around.
NO GO
A more likely outcome is that the deal falls apart. And then what?
Before the Dell buyout talks began, the stock barely fetched $10 dollars a share. If the offer falls through, is that the target?
Probably not.
MORE DOWNSIDE THAN UPSIDE
But I think it is safe to say that there is a lot more downside than upside at this point. If you want a low-risk trade for the next week, short Dell. If Michael Dell’s offer is accepted, you take a small loss. But if it is rejected, you might enjoy a quick 15% return.
