With today's ISS report endorsing the Michael Dell / Silver Lake buyout of Dell, and with the market up on the likelihood that the deal will go through when shareholders vote on July 18, I suppose it's about time to start the postmortems. How do you see the winners and losers? The opposition, led by Southeastern Asset Management and Carl Icahn, look increasingly like goofballs. Like: here was Dell, with a cash takeover signed at $13.65 per share and no competing bidders in sight. Southeastern and Icahn teamed up delightfully to both sell low and buy high: Southeastern sold millions of shares at below the deal price,1 while Icahn's average cost in his shares appears to be at least $13.70. Throw in his share of the proxy solicitation costs and he's out about $12 million, plus whatever he paid for the rather uninspiring financing commitments for his hypothetical tender offer, though to be fair those seem to have been payable mostly to himself. Anyway here:2 [Update:wasn't counting the June $0.08 dividend in his basis; if you include that then he's basically breaking even rather than losing $12mm. Correct chart in the footnote.2A]
Is $12mm or so a lot for Icahn to lose? No obviously not. Now, separately, there is the issue of his devoting a lot of time and energy to what so far seems to have been a dismally failed battle3 - his various alternative proposals went nowhere, he's lost the fight for ISS, and the market now seems to think the Silver Lake deal will go through - but how would you value that? One reasonable characterization would be "Carl Icahn has gotten months of very high quality entertainment out of this situation, and given his financial situation and desire for entertainment, that's pretty cheap at $12 million."4 That's like one Steve Schwarzman birthday party, and Icahn had to have had more fun doing this.
You know who probably had less fun? One, Silver Lake, and two, whoever wrote the presentation that Dell filed on Fridayin connection with its pitch to ISS. Like, oh, sure, there's some gleeful sarcastic Icahn-bashing - check out slide 7, which asks of Icahn's math, "How can Dell be worth 12.0x EBITDA when its closest peer, HP, trades at 4.6x EBITDA?" - but most of it has a grim air of "we've made a huge mistake." Silver Lake: are you excited for your sub-20% IRR?
Then there's slide 11, which shows the alternate universe where Dell isn't acquired. It goes like this:
- The median Street price target, pre-deal talk, was $12.50.
- That was based on a median 2014 EPS estimate of $1.67.
- At current median EPS estimate of $1.03, you get a price target of something like $7.71.
Eep! As ISS puts it in their report:
Shareholders might consider that the company’s value lies closer to the current offer of $13.65 than the dissidents’ $23 per share value, particularly if the PC business is deteriorating more rapidly than expected. With further, more detailed consideration of the valuation assumptions, moreover, the indicative value may be more likely to go down than up. The fact that Blackstone in particular – aided by having Dell's former head of M&A on its due diligence team – withdrew from bidding after evaluating the progress of and outlook for the transformation – would appear to lend credence to this view.
So, good, vote for the deal, take the $13.65, whatever. But Icahn makes a good point in his salvo today:
The Special Committee keeps telling us how bad Dell is, and despite our $14 proposal for a Dell self tender offer, the Special Committee keeps recommending the $13.65 Michael Dell/Silver Lake transaction, and in our opinion, keeps using scare tactics about what will happen if the Michael Dell/Silver Lake transaction does not close. The entire situation reminds me of the story of the visitor who overstays their welcome at your house. They keep threatening to leave, but when you say goodbye...they just don't go.5
I can't but help ask myself why, if Dell is so awful, do Michael Dell and Silver Lake, both very astute investors, want to buy it. And, how have they amassed billions in financing from astute financial institutions to finance that acquisition if everything is so bad? I suggest we all ask ourselves that question.
Do you get the slightest sense that Silver Lake is doing exactly that?
1.Most notably 72mm shares at $13.52 to Icahn a few weeks ago, but also frittering away shares in market transactions at below the deal price since the deal was announced. Those, though, were presumably non-discretionary sales by Southeastern clients. The Icahn thing is on them.
2.Here you can read a claim that Icahn's basis in Dell is under $13.65 but that seems to be based on nothing. My sources are listed here - all EDGAR filings by Icahn - though there's some approximation as he doesn't list the prices for all of his February/March purchases. He does list the days; I just use the low consolidated price for those days so this should be the minimum that he paid. But the large majority of his shares were bought in April and June at disclosed prices - April at $13.89 (via call options with $5.39 premium / $8.50 strike) and June from Southeastern at $13.52.
3.Also time value of money but, whatever, it's all his cash and he's loaded.
4.Other possible characterizations, like "how frustrating it must be to put in all this work and come away with nothing," seem to me to misunderstand Carl Icahn, but what do I know.
- Does that constitute a story?
- If so, it is a terrible story.
- If not, is there some well-known story that he's alluding to and we're supposed to fill in the story?
- What is it?
Like I keep saying, the man knows how to entertain himself.