How Much Do Shareholders Think Dell is Worth?

Even though financing for Dell’s (NASDAQ:DELL) leveraged buyout is nearing completion, shareholder displeasure has slowed the deal’s momentum slightly. Ten days ago many of Dell’s shareholders were angry over Silver Lake’s proposed offer of $13 to $14 per share for the company, but with the private equity firm increasing its bid to $15 per share, the deal may have come closer to being finalized.

Shares of the computer company jumped a little more than 3 percent temporarily on Tuesday after the Financial Times reported the higher offer.

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But whether the new $15-dollar-per-share proposal will satisfy shareholders is still unknown. According to Barron’s, the deal could be met with shareholder opposition and potentially lawsuits if the price is too low. The earlier bid was already deemed unsatisfactory. A $14-per-share leveraged buyout would “amount to insiders trying to steal the company,” a shareholder told the publication last week.

When taking into account Dell’s expected earnings of $1.70 per share for the current fiscal year, which ends later this month, and $1.65 cents per share for the next fiscal year, the offer does appear a bit low. Silver Lake’s offer would value the company at just 8.4 times projected forward earnings, without taking into account Dell’s $5 billion of net cash. A leveraged buyout is usually priced at 15 times after-tax earnings…

As Barron’s columnist Andrew Bary noted, “It is unprecedented for a large company to go private at such a paltry P/E, and Dell’s board might have a hard time backing such a sale.” Dell may be struggling in the personal computer business, but it is still a profitable company with net earnings of approximately $3 billion predicted for both the current and next fiscal years.

Even a $15-per-share offer may be too low. “I don’t think an LBO would get much support at $15 a share,” Pzena Investment Management Chief Investment Officer Richard Pzena told the publication. “We might think about supporting an LBO at $20, but at $15, we think an LBO would amount to insiders trying to steal the company because of current market conditions.” Penza said his firm, which held 14 million Dell shares on September 30, has determined the company’s worth to be $25 per share.

Many shareholders, including value investors like Dodge & Cox and Southeastern Asset Management, have balked at the low-priced buyout because they purchased their stakes in Dell when the company traded close to $17 per share. But Bernstein analyst Toni Sacconaghi noted that “simple math” suggests that these shareholders will be unable to block the deal because of the size of the stakes held by founder and chief executive Michael Dell and the takeover arbitrageurs and index funds, which amount to 15 percent and 8 percent, respectively.

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