Strubel Investment Management, LLC
1853 William Penn Way
Lancaster, PA 17601
February 13, 2013
Board of Directors
One Dell Way
Round Rock, TX 78682
Attention: Lawrence P. Tu, Senior Vice President, General Counsel,
Dear Board of Directors:
Strubel Investment Management, LLC, is a shareholder of Dell
) (or "the Company") and provides advisory services to clients who
also are shareholders of the Company. We are writing to express our
extreme dissatisfaction with the proposed go-private transaction,
which we believe grossly undervalues the Company. We are also
writing to inform you that we will vote against the proposed
transaction and advise our clients who are shareholders in the
Company to vote against the proposal as well.
The basic function of a board is to oversee management, to hold
it accountable, and ensure all shareholders are treated equitably.
We believe the board has failed this duty in a dramatic
By allowing such a transaction to take place at a price of $13.65,
the board is essentially allowing Mr. Michael Dell to steal
the Company from current shareholders
. We believe the intrinsic value of the Company is far greater than
$13.65 per share. Specifically, the following supports our
Strubel Investment Management believes that a straightforward
valuation of the non-PC portion of the Company together with the
net cash on the balance sheet yields a valuation that vastly
exceeds the $13.65 per share offer. This is before even taking
into account the value of the PC business which we believe is in
The Company has astutely realized that the PC business is
unattractive and in secular decline. Starting in earnest in 2007
when Michael Dell resumed his role as CEO, the Company has
embarked on a multiyear plan to transition Dell from a commodity
PC company to an end-to-end computing solutions provider focused
on small and medium sized businesses. The Company has spent more
than $13.7 billion on acquisitions to build out this line of
The Company has frequently touted the success of these
acquisitions and has not taken or discussed the possibility of
taking any write downs on any of the acquisitions. Indeed, at the
June 2012 analyst day, Brian Gladden, Dell's CFO, said that in
aggregate the acquisitions have generated an internal rate of
return of 15%.Therefore we have no reason to assume that this
portion of Dell is not successful and healthy.
In our valuation of Dell, we will focus solely on the non-PC
portion of the business.
Cost of goods sold
Interest expense and other
Provision for income taxes
Adjustment for continued acquisitions
Pro forma net income
Net income multiple
Value of Dell non-PC business
Value of Dell PC business
Add: Cash and investments
Less: Short term debt
Less: Long term debt
Add: DFS financing debt (included in DFS segment)
Add: Book value of DFS
The value of just the 'new' Dell greatly exceeds the offered
price of the go-private transaction.
We also note that your largest outside shareholder,
Southeastern Asset Management, Inc., sent you a letter dated
February 8, 2013, in which they outlined similar concerns over
the inadequacy of the current go-private transaction. In that
letter, Southeastern also estimated, employing a different
valuation methodology, the intrinsic value of the Company in
excess of $23 per share. There are now two shareholders that have
presented two different simple, straight forward valuations of
the Company that show its value far in excess of $13.65.
In summary, the evidence that the go-private transaction as
currently structured is woefully inadequate is overwhelming.
We are at a loss as to how the board could see fit to believe
the Company is fairly valued at only $13.65 per share. Indeed, as
of November 2012, the Company has spent $700 million repurchasing
46 million shares at an average price of $15.21 and has been
repurchasing shares at an average price of $17.65 per share as
recently as May 2012. If less than one year ago the Company and the
board believed that repurchasing shares at a price as high as
$17.65 was in the best interest of shareholders and that the
Company was worth $17.65 per share or more, then why does the board
now believe the intrinsic value of the Company is $13.65 or less
and that the current go-private transaction is in the best interest
We are also unable to comprehend the board and management's
rationalization that the Company is best served by being taken
private. The only explanations given in regards to the rationale
behind the go-private transactions have been statements by Mr. Dell
in the press release dated Feb. 5, 2013, and an interview the
current CFO Mr. Gladden gave to Reuters on Feb. 5, 2013.
In the press release Mr. Dell states:
we continue the execution of our long-term strategy and focus
on delivering best-in-class solutions to our customers as a
private enterprise. Dell has made solid progress executing this
strategy over the past four years, but we recognize that it will
still take more time, investment and patience, and I believe our
efforts will be better supported by partnering with Silver Lake
in our shared vision.
Reuters quotes Mr. Gladden as stating:
Under a new private company structure, we will have time and
flexibility to really pursue and realize the end-to-end solutions
strategy. We will be able to pursue organic and inorganic
investment and we won't have the scrutiny and limitations
associated with operating as a public company.
So we are generally very, very encouraged by the future
Without having really the scrutiny that is associated with a
publicly traded stock, we can make the necessary investment and
stick to plan, in some cases be more aggressive than we can
Reuters also attributes the following to Mr. Gladden:
Dell Chief Financial Officer Brian Gladden told Reuters in an
interview on Tuesday that the company can now pursue its strategy
without being limited by the pressures of public ownership.
Gladden acknowledged that the turnaround will take more time
and investment, which the company plans to make as a private
enterprise that will have less emphasis on quarter-to-quarter
It appears, based on quotes given by management, that
the sole rationale for taking the Company private is that
Mr. Dell and Mr. Gladden do not like running a public
. Beyond empty platitudes and ephemeral references to creating the
holy grail of modern finance, "stockholder value," it appears that
management and the board are unable to clearly identify how the
go-private transaction is beneficial to current shareholders.
We note Mr. Dell and Mr. Gladden received $16,138,498 and
$8,177,566 in total compensation during the Company's 2012 fiscal
year. Surely Mr. Dell and Mr. Gladden,
making 474 and 240 times the average worker's
, are paid handsomely enough to cope with the extra scrutiny that
comes with running a public company. We roundly reject the notion
that Mr. Dell and Mr. Gladden are unable to function to their true
potential due to running a public rather than private company.
If the Company finds the quarter-to-quarter focus of "Wall
Street" to be such a burden to management as to affect their
ability to run the Company, then we suggest they follow the
Berkshire Hathaway Inc. model and cease issuing guidance and cease
holding quarterly conference calls.
Additionally, we find absurd the notion that going private will
allow the Company to better execute its long-term strategy. As the
Company's current strategy of transitioning to an end-to-end
enterprise IT solutions provider is not dependent on continued
access to equity markets, the quarter-to-quarter stock price
fluctuations and the pontifications of Wall Street "analysts" are
irrelevant to the Company and its ability to create significant
value for shareholders in the future.
We are baffled by the reasons management has given in its
attempt to justify the go-private proposal. We are also equally
astonished that the board apparently concurs that the current
course of action represents the best option for all
Again, we refer to the Feb. 8, 2013, letter sent by your largest
outside shareholder, Southeastern Asset Management, Inc. In that
letter, they proposed several alternatives to the current
go-private transaction, including a dividend recapitalization plan.
We have reviewed the Southeastern proposal and believe it is a far
superior option for creating value for shareholders in the near
term. We intend to fully support Southeastern's effort to block the
current go-private transaction and will support Southeastern should
they attempt to implement their alternate proposal at a later
In closing, we remind the board that they have a fiduciary duty
to ensure all shareholders are treated fairly and equitably. Let
the fools sell their shares of the company low, but do not force
every shareholder to be a fool.
As a shareholder, we also respectfully request an explanation as
to why the board and management considered Company shares
undervalued at average prices of $17.65
less than one year ago
when they authorized a share repurchase plan and repurchased shares
respectively and why they now consider Company shares to be fully
valued at $13.65.
/s/ Benjamin J. Strubel
Benjamin J. Strubel
President and Portfolio Manager
1 1,736,000,000 shares outstanding as of Nov. 2,2012.
2 TTM revenue of Servers & Networking, Services, and Dell owned
IP Storage segments.
3 Based on company statements that over half of gross margin is
from non PC sources.
4 Based on TTM operating expense ratio.
5 TTM interest expense and other expenses.
6 Based on three-year average historical tax rate of 22.73%.
7 Based on 50% of five-year average historical acquisition
spending. Dell spends much less than competitors on R&D and
continued acquisitions and/or increased R&D spending will be
needed to maintain 8 Current 12-month P/E ratio of Dell's
self-selected "close comparables" peer group.
9 DFS financing costs included in DFS segment.
10 $3.1 billion book value of DFS based on receivables less
11 Bureau of Labor Statistics average worker wage in 2011 of
I am long [[DELL]]. I wrote this article myself, and it expresses
my own opinions. I am not receiving compensation for it. I have no
business relationship with any company whose stock is mentioned in
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