The Dell Put
The Dell Put
AAPL, HPQ, MSFT
The management-led buyout of Dell Inc. NASDAQ:DELL is far from a done deal. When the deal was in the rumor mill, LTN came up with a maximum valuation of 15.00 per share down to 13.60 for what a buyer would pay and what the stakeholders could agree to.
With the buyout price now set at 13.65, it is no surprise that the big institutional shareholders are fighting that price.
Savvy observers have a different take than what the media reports. They are not convinced that Michael Dell wants to acquire Dell in a management-led buyout. Though he may want it they think there is a backup plan that is not being reported.
The size of the deal is huge, and repatriating the overseas capital to help pay for the deal will come at a big price.
The take is that investors should consider this effort as “The Dell Put!” being the worst case scenario.
The best case scenario would be a higher buyout price.
Either way, Michael Dell’s effort may have ambitions other than what the headlines and media coverage have folks believing.
Consider this, if Michael Dell is not really interested in taking the company private, the end result is that Mr. Dell is really trying to establish a floor price in the stock.
The Big Q: what will that floor be $13.65?
Perhaps, Mr Dell thinks that the downside of the deal falling apart is that the stock will not trade under 12.50 or 13.00 in the future.
To get to this POV, you have to do is step into the mind of the billionaire whose fortune is tied to the share price of his company. That is not just any company, but the share price of a PC-maker.
Now that Apple Inc. NASDAQ: AAPL has been waging war on Windows-based PCs and winning, and now that Hewlett-Packard Co. NYSE: HPQ is in a multiyear re-org, this has to be unsettling for Mr. Dell.
Getting Microsoft Corp. NASDAQ: MSFT is an interesting angle. If the deal falls apart, perhaps Michael Dell would still consider including Microsoft as a financial partner going forward.
Consider this, the Dell LBO may end up being a very intelligent share price hedging maneuver by Michael Dell.
If he does not get to acquire the company outright, he can say , “This deal was deemed today as not being an attractive price for Dell’s shareholders. These shareholders can have the comfort that I have a standing offer at or close to the proposed 13.65 share price, and I am willing to resubmit this offer in the future when the mix of shareholders owns shares at a lower price.”
Does this mean that $13.65 is a floor?
No, Mr. Dell probably has in the back of his mind that the floor might be 12.50 or somewhere around that. Dell’s stock was right around 11.00 before the buyout news came out.
Shares traded under 9.00 in Y 2012. If Michael Dell can spend a few months of effort and a few hundred million trying to get this deal done, the backside implied floor,aka the Dell put, would add enough value to Dell’s share value to make the whole exercise worth the effort.
Having a 45-day “Go Shop” period is not out of the ordinary.
Note: this allows the world of brokerage firms and strategic buyers to go out and see if Dell could or would be acquired for a higher price than 13.65 by someone else. This allows Mr. Dell to take the money and run.
Leading to the argument of a “Dell Put” that might bring about some sort of floor that is much higher than what the stock market took Dell down to before this buyout saw the light.
Investors need to consider that buyout rumors around Michael Dell trying to take the company were around before they surfaced again this year.
If the Special Committee admits that it held 25 formal meetings, this means that this deal has been in the works for a long time.
With Dell’s share price so low before the buyout, that only brings more credibility to the price ambition in the deal.
Michael Dell appears to have figured out how to engineer “The Dell Put.” Stay tuned…
Heffernan Capital Management
Business Development Director – Private Client Group,
3 Raffles Place #07-01
Bharat Building Singapore 048617
Tel: +65 6329 6408
Fax: +65 6329 9699
Paul A. Ebeling, Jnr.
Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster’s Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.
Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.
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