Dell (Nasdaq: DELL)
kickstarted the era of affordable personal computers -- and made
many people very wealthy along the way.
Then, it lost its way, eventually culminating in its recently
It's hard to pinpoint precisely where Dell got off track, but
it's clear that the company became an also-ran in the various
technology niches in which it operated. It's a business badly in
need of a fix.
And Dell's board apparently realized that it's much easier to
fix this business away from the scrutiny that comes with being
apublic company . So Dell is attempting to "go private" in a
$24-billion deal thatwill enable founder Michael Dell and
hisinvestment partners to make radical moves that may hurt the
company's results on a short-termbasis -- which the public never
likes to see -- but (presumably) set the stage for long-term
It's a big deal when a company as prominent as Dell goes
private, but it's hardly unheard-of. And every time it happens,
there are things you can learn to become a smarter investor.
Let me explain…
1. Not allrevenue is created equal.
The past five years proved to be especially challenging for Dell.
Although the company made a number of acquisitions, its sales in
fiscal (February) 2012 of $62 billion were just 1% higher than four
Translation: Without the revenue that those acquisitions brought
in, Dell's sales base actually would have shrunk by a considerable
amount in recent years.
Meanwhile, other high-tech companies such as
Google (Nasdaq: GOOG)
Apple (Nasdaq: AAPL)
Amazon.com (Nasdaq: AMZN)
Microsoft (Nasdsq: MSFT)
managed to maintain more respectable growth rates.
That's an important lesson for investors. It's not enough for a
company just to increase its revenue. The way in which the revenue
increases is just as important.
2. Strong companies get bought out, too.
Fixing a broken business is one of the two main causes behind
companies' decisions to exit the public markets. The other cause:
When a company is doing quite well, controls an attractive industry
niche and would aid an even larger firm in its efforts to crack a
newmarket . That's the method
deploys -- the company identifies industries that it hopes to
dominate and then finds the best operators in that industry. Right
now, GE is snapping up a number of great companies to help form the
backbone of a new division, GE Energy.
3. Buyouts can be great for shareholders.
Although it may seem that Dell's suggested $24 billion purchase
price was the result of a concrete analysis of the company's value,
buyouts are actually more art than science. Both parties start off
with very different views of what a business is worth. And then
they parry and thrust until a mutually satisfactory number is
There is one hard and firm rule that these negotiators must
heed. Any buyout price must be considerably above the current
trading price. Otherwise, existing shareholders would wonder if a
buyout gives them any benefit. When Dell's buyout talks began in
the summer and fall of 2012,shares traded below $10. So the
$13.50-per-shareoffer to take the company private represents nearly
a 40% premium. With such a built-in booster shoot, most
shareholders are likely to give a thumbs-up to the transaction.
4. Shareholders have choices when buyouts happen.
When a company receives overtures from a potentially interested
buyer, the company'sboard of directors must assess the sincerity of
the interest and determine what price the buyer is hoping to pay
and whether the deal will be paid incash andstock . The board must
then make its own assessment of the company's value, generating
what is known as a "fairness opinion" (which is often provided by
investment banks that act as anadvisor in any transactions).
To be sure, not all corporate boards act in the independent
manner that they should. Many times, the board members are close
friends with top management and are inclined to simply
"rubberstamp" whatever management wants. Whenever this happens,
outside shareholders can raise an objection. You'll often see
amutual fund orhedge fund manager seek out alliances with other
outside shareholders to force management and the board to reject a
buyout offer until its value has been increased.
Assuming a buyout will proceed as planned, investors can either
sell their shares immediately or wait for the transaction to close.
Often times, the current share price will be a bit below the buyout
price, reflecting the possibility that the deal will fall through.
That's why many investors choose to hold on until shares move up to
the buyout price. If you do nothing, then the cash from the sold
shares is simply be deposited into your brokerage account when the
deal closes -- typically three to four months later. (Unless a
company is being acquired with another company's stock, in which
case you receive stock of the acquiring company instead.)
If you don't want to sell, then there isn't much you can do to
block a deal, unless larger investors (such ashedge funds and
mutual funds) are against the deal and actively reach out to enough
investors to gain control of more than 50% of the company's voting
stock. This is a fairly rare occurrence.
5. It's smart to be wary of buyout rumors.
Dell is not the first technology company to be acquired or go
private. The entire industry is always in the midst of rapid
change, with new products that can leapfrog existing products. Many
investors start to focus on companies like Dell when they have
stumbled badly, presuming that management will fix the business --
or sell it.
By the time shares of Dell traded below $10 a share last summer,
the company'smarket value had slumped to $16.5 billion of just 25%
of its prior year sales base. That's virtually unheard-of and a
clear sign that some sort of bold move might soon take place.
There's an old saying onWall Street : Never buy a company's
stock in hopes of a buyout. Indeed, most rumored buyouts never even
come to pass. Instead, look at the possibility of a buyout as just
one of many potential positives when you are assessing a
Let's use data storage firm
as an example. This company has been repeatedly mentioned as a
potential buyout target, and every time the rumor mill churns up,
the stock spikes nicely higher. And then the rumors fade and those
who had been hoping for a buyout are leftholding the bag.
Now, with shares trading below $18, Fusion-io is trading closer
to the fundamental value of its business. Someanalysts say this
company has a very bright future, and some even suggest that a
buyout will eventually happen. Making a bet on such an outcome
looks much wiser when shares are washed out, as they are now.
Action to Take -->
There's a good chance that some of thestocks in your portfolio will
be bought out in coming years. It's the natural Darwinian evolution
of publicly-traded companies. Indeed, many of the companies that
were in the original Dow Jones Industrial Average don't even exist
as public companies any more. They've long since been acquired.
To reiterate, never buy a stock simply because you think it has
buyout potential. But use that sentiment as part of your broader
investment thesis for a stock.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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