Billionaire Carl Icahn seems to be quite keen on his activism at Dell Inc. (NASDAQ:DELL). Recently, he also acquired 72 million shares of the company from another activist investor Southeastern Asset Management, with the total transaction worth close to $1 billion. With this move, Carl Icahn owns more than an 8% stake in Dell, becoming the second largest shareholder in one of the world’s biggest PC makers.
The bidding war seems to never end
The bidding war started when Michael Dell and the private equity firm Silver Lake Partners offered to buy out the whole company at $13.65 per share, or $24.4 billion. Right after that, Southeastern Asset Management, the second biggest shareholder at that time, argued that Dell Inc. (NASDAQ:DELL) was worth around $23.72 per share with the sum-of-all-parts valuation technique. The $23.72 per share valuation includes $11.72 per share for Dell’s businesses (DFS, Server, Support and Deployment, PC Business and Software and Peripherals), $3.64 per share in cash, and the acquisitions since 2008 of $7.58 per share. Carl Icahn also thought that Dell Inc. (NASDAQ:DELL) should be worth $22.81 per share, with a $9 special dividend and $13.81 “stub” value using discounted free cash flow valuation method).
Afterwards, Carl Icahn and Southeastern Asset Management joined forces to make the “leveraged recapitalization” proposal with the option to either receive $12 per share in cash or $12 in additional shares valued at around $1.65 per share. However, that proposal had been rejected by Dell’s board. In the recent investor presentation, Dell Inc. (NASDAQ:DELL) summarized that the net funding of $17.3 billion of Icahn/Southeastern offer comprises $8.8 billion in Dell cash, $3.3 billion in net financial receivables proceeds and $5.2 billion in bridge loans. However, the financial receivables and bridge loan funding were not committed.
Dell Inc. (NASDAQ:DELL) thought that because of high leverage, it would significantly increase Dell’s risk profile with a weaker financial position to transform the business. After the deal, still two-thirds of Dell’s revenue was coming from the declining PC business. Looking forward, the company said that the new Dell Inc. (NASDAQ:DELL) would focus on Enterprise Solutions Group (servers, peripherals, networking and storage), and Services. By Q1 FY 2014, 88% of Dell’s operating income would come from Services while the remaining 32% would come from the Enterprise Solutions Group.
To respond, after acquiring 72 million shares from Southeastern, Icahn pushed the company to buy back 1.1 billion shares at around $14 per share, with the total investment of $16 billion. As Dell has around 1.75 billion total shares outstanding, this buyback could be considered huge, retiring around 63% of the company’s total share count. The buyback would be financed by $7.5 billion in Dell cash, $2.9 billion in Dell Inc. (NASDAQ:DELL) receivables and $5.2 billion in debt. At the current trading price of $13.40 per share, Dell is valued at 5.24 times its trailing EBITDA.
How about Hewlett-Packard and Lenovo?
Another big global PC maker, Hewlett-Packard Company (NYSE:HPQ), has a bit lower EBITDA multiple. It is trading at $25.40 per share, with a total market cap of $49 billion. The market values Hewlett-Packard at 4.37 times its trailing EBITDA. Hewlett-Packard Company (NYSE:HPQ) previously “bought” its R&D, pouring money into acquisitions rather than developing internal R&D. In R&D, the percentage of revenue has been declining rapidly, from more than 11% in 1987 to only 2% in 2012. Because of the acquisition spree several years ago, the company had to write down as much as $8.8 billion on an $11 billion purchase of Autonomy at the end of 2012. What investors might focus on is its substantial ongoing business restructuring under Meg Whitman’s leadership. However, Hewlett-Packard still booked an extremely high level of goodwill and intangibles on the balance sheet. As of Apr 2013, the goodwill and intangible were more than $35 billion, much higher than its equity of only $23.5 billion. The high level of goodwill and intangibles makes the company quite vulnerable to a sudden write-off in the future, which would slash the company’s share price on the market.