A lot of Dell Inc. (NASDAQ:DELL) shareholders are unhappy and they have a good reason to be. CEO Michael Dell and equity investment firm Silver Lake are offering to buy out Dell shareholders at a price of just $24.4 billion, or $13.65 per share. Southeastern Asset Management, T. Rowe Price Group, and other major Dell shareholders have declared their opposition to the proposed buyout deal.
Overall, the proposed deal undervalues Dell. In the trailing 12 months (TTM), Dell earned $1.48 per share. Thus, Michael Dell is offering to buy the company at a PE of just 9.22. Taking into account Dell’s negative tangible book value per diluted share of about $1.44, the offer, based on TTM earnings, is a PE of 10.20. The offer looks even worse when using fiscal year 2012 earnings. In FY 2012, Dell earned $1.88 per diluted share, which translates to a buyout PE of just 7.26. Taking into account the negative tangible book value, the offer is a PE of 8.03 based on FY 2012 earnings.
Struggles and PC transition
Dell has been struggling. In Q3 FY13, Dell posted declines in net income and non-GAAP net income of 47% and 31% year over year, respectively. Revenue from Desktop PCs and Mobility fell by 25.8% and 8.5% year over year, respectively. While the PC industry is also struggling, Dell has been performing worse than the industry. According to IDC, Dell’s total PC shipments dropped by 20.8% in the holiday quarter. In comparison, total PC shipments declined by 6.4%. Furthermore, the rise of the mobile device industry remains a big threat to Dell.
While there are significant problems with Dell, Michael Dell is taking advantage of the situation. The desktop PC industry is still crucial to the modern world. In Q4 2012, almost 90 million PCs shipped worldwide and Dell was the third largest PC vendor worldwide. Also, Dell was the third largest server vendor worldwide in Q3.
In addition, the PC industry is in a transition period. Microsoft Corporation (NASDAQ:MSFT) launched Windows 8 during the holiday quarter, an important step because the OS’ Modern UI makes it suitable for tablets. Currently, the tablet market is booming and is dominated by Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG) Android. In Q4, tablet shipments increased by 75.3% year over year to 52.5 million units. Apple’s unit shipments rose to 22.9 million, but its market share dropped to 43.6%. On the other hand, Android continued its surge. ASUS, which is selling the Google Nexus 7 tablet, saw shipments increase by 402% year over year to 3.1 million units.