Shares of Dell Inc. (NASDAQ:DELL) fell as low as $12.71 on Friday, even as founder Michael Dell’s proposal to buy the company for $13.65 goes before shareholders two weeks from now. At first glance, Dell Inc. (NASDAQ:DELL) might seem like a no-brainer “buy” candidate (invest $12.71 now, get $13.65 after the proxy vote on July 18).
However, this is far from being the whole story. An activist campaign led by Carl Icahn’s Icahn Enterprises LP (NASDAQ:IEP) investment fund has made Dell perhaps the riskiest stock in the market. Icahn Enterprises LP (NASDAQ:IEP) believes that Michael Dell’s proposal to buy the company significantly undervalues Dell Inc. (NASDAQ:DELL). Yet while Icahn probably has the heft (and the votes) to scuttle Dell’s go-private deal, he is unlikely to garner enough support to implement his proposal to increase shareholder value through a $14 tender offer.
The results are likely to be very disappointing for Dell shareholders. If this “clash of the titans” between Dell and Icahn Enterprises LP (NASDAQ:IEP) ends in a stalemate, the company will find itself without a clear strategic direction and its valuation could revert to a much lower multiple, in keeping with Dell’s uncertain prospects.
1. Dell-Silver Lake buyout on the rocks
Investors can debate whether the $13.65 buyout offer from Michael Dell and hedge fund Silver Lake Partners recognizes the “full” value of Dell. However, one thing cannot be disputed: Until Michael Dell and Silver Lake came along with a proposal to take the company private, Dell Inc. (NASDAQ:DELL) stock was worth much less, bottoming below $9 in late 2012.
The rapid rise in Dell’s stock price in early 2013 was a direct result of the buyout offer. Indeed, as Dell’s “Special Committee” pointed out in a shareholder presentation released Friday, the PC industry outlook has been revised lower numerous times in the past year. Company fundamentals have also suffered, lagging those of competitors like Hewlett-Packard Company (NYSE:HPQ).
This hasn’t stopped Icahn from making the rounds on TV to tell anybody who will listen that Dell is worth far more than $13.65. Yet as the Wall Street Journal recently noted, Icahn has not offered to buy the company at any price; he wants Dell to fund a $14 tender offer with the company’s cash on hand and new debt.
In late 2012, when Dell Inc. (NASDAQ:DELL) shares were mired below $10, most shareholders would have taken $13.65 in a heartbeat. Icahn’s muckraking has clouded the waters; many shareholders now seem unwilling to sell at that price. Indeed, the Special Committee of Dell’s board recently advised Michael Dell and Silver Lake to raise their bid in order to improve their chances of winning the upcoming shareholder vote. However, according to a Bloomberg report on Friday, Dell Inc. (NASDAQ:DELL) and Silver Lake will not budge.
2. Icahn’s tender offer: a long shot
Shareholders voting against the Dell-Silver Lake buyout offer are probably doing so because they have been convinced that Icahn’s tender offer plan would offer more value. However, investors need to understand that even if the Dell-Silver Lake buyout is rejected, Icahn’s plan has a very low probability of being implemented.