) is the definition of a fallen angel. This former tech darling has
fallen to earth after years of flying high. It is also a company
that bedevils me. Is it ridiculously undervalued or a value trap
that will ultimately burn shareholders?
At year-end 2009, Dell had approximately $11 billion in cash and
$4 billion of debt. Add in $2 billion or so in annual free cash
flow and there is something to get excited about. This is
especially true considering the company's $25 billion market value.
Not surprisingly some of my favorite value firms are among the
largest owners of Dell shares, including Southeastern (Longleaf),
Brandes, and Harris Associates (Oakmark).
Earlier this year, I too was seduced into owning Dell. It didn't
last long. A talk with investor relations woke me up. In discussing
uses of cash, we covered buybacks, special/regular dividends,
acquisitions and more. It became very obvious that acquisitions
were to be the focus. In closing, the investor relations rep said
my opinions were similar to those of Mason Hawkins. I took that as
a huge compliment, but it wasn't meant to be. Dell clearly has no
intention of listening to either of us.
This is a company that doesn't speak our language, to say
nothing of their "new math".
I've seen companies fritter away billions and have nothing to
show for it thanks to this attitude, so my Dell shares quickly
found new homes. Given the continued decline in Dell shares, I
should be grateful, but I keep revisiting this company and its odd
Given Dell's track record on share repurchases, one can
understand if the company swore off buybacks. Shares have declined
from nearly 3 billion shares to below 2 billion in the past 15
years and the stock has fallen nearly the entire time. In fact,
since the shares peaked in 2000, shares outstanding have dropped
from 2.6 billion to 1.9 billion. Hindsight tells us that they
should have been more patient. Ironically, the cheaper the shares
have gotten the less attractive they've become to Dell management
as a use of excess cash. Buy low? No thank you.
As for dividends? Just like real men don't ask directions, real
tech companies don't pay dividends. This is especially so for
"growth" companies. And that is how Dell sees itself, even if the
world no longer does. And paying dividends sends the wrong message.
And here I thought dividend payments were about using capital
Instead Dell has decided to hold the cash and use it to "invest
in the business". For the uninitiated, that's code for
acquisitions. In this, Dell looks like a desperate company. Margin
compression in Dell's core business helps explain why this may be
the case. Of more concern, everywhere Dell wants to be there seems
to be a superior company occupying the space.
Whether large integrated firms like [[IBM]] and HP (
) or specialized firms like storage giant [[EMC]], Dell seems
caught in the mushy middle strategically. This 2009 headline speaks
Dell to Buy Perot in Catch-Up Deal.
Perhaps in response to Hewlett Packard's purchase of EDS, Dell
bought Perot Systems a year ago for $3.9 billion, a 68% premium to
Perot's public market price and 30x its earnings.
Shareholders should be relieved in a way. The Perot deal was r
elatively cheap compared to the attempted purchase of 3Par. Whether
it's the $18 a share bid in August or the final one at $32 (or $2.4
billion), it is a hefty bid for a company that is barely
profitable. The financial press must have been feeling nostalgic
about the Internet Bubble because they were again able to use the
price-to-sales multiple to explain the deal instead of
price-to-earnings. In fact, HP "won" the day with a bid valuing
) at 8 times sales. Congratulations!
I've been told many times that as a value investor, I just don't
understand growth, that I am incapable of understanding the world
of possibilities that opens up because of such strategic
acquisitions. I admit that I hate the word "synergy" and have no
imagination! I will only say that growth is a variable to be valued
not an end. Growth at any price does not benefit shareholders.
If this was a make or buy decision, both companies are admitting
something by the price they were willing to pay for PAR. By
ignoring other uses for cash, Dell is admitting still more.
A value trap is a company that may be undervalued, but where
intrinsic value is falling. Margin of safety is eroded and there is
no guarantee of upside. Some companies do this by losing money and
burning up asset value. Others do it through poor capital
If the competitive environment and value were static, Dell would
be a buy. But these are dynamic forces. Dell's reaction to their
competitive positioning is eating away at intrinsic value.
Dividends and aggressive share repurchases (at current prices)
would be vastly superior to acquisitions at ridiculous prices.
Luckily for Dell, 3Par found a "greater fool" in HP, but don't
think that another deal isn't around the corner. Lexmark (
) perhaps? Either way, this flailing around isn't pretty to
If Dell keeps throwing its cash away, their IR department can
relax. That phone won't be ringing as often.
Disclosure: In addition to numerous Dell computers,
author owns LXK
The Great Australian Housing Bubble