Tuesday, March 26, 2013

What's Dell Really Worth?

Last month I wrote a piece comparing Michael Dell's bid to take his company private to John Rockefeller and Standard Oil a century ago.

As I wrote on February 11, 2013,on Random Glenings,  when the Supreme Court ruled in 1911 that Standard Oil was to be broken up based on antitrust regulations, Rockefeller was unfazed.

I quoted extensively from Ron Chernow's excellent book on Rockefeller called Titan:

John Rockefeller - head of Standard Oil - was not fazed.  Here's what Ron Chernow wrote in his epic book Titan about Rockefeller:

Rockefeller reacted {to the decision} with studied nonchalance.  He was golfing at Pocantico with Father J.P. Lennon from the Tarrytown Catholic church when he learned of the decision, and he did not seem particularly disturbed.  "Father Lennon," he asked, "have you any money?" The priest said no, then asked why.  "Buy Standard Oil, " Rockefeller said - which turned out to be sound advice.

Chernow went on to write why Rockefeller was not concerned by the government's decision:

Those who had seen the Standard Oil dissolution as condign punishment for Rockefeller were in for a sad surprise:  It proved to be the luckiest stroke of his career.  Precisely because he lost the antitrust suit, Rockefeller was converted from a mere millionaire, with an estimated net worth of $300 million in 1911, into something just short of history's first billionaire...

What quickly grew apparent...was that Rockefeller had been extremely conservative in capitalizing Standard Oil and that the split-off companies were chock-full of hidden assets...

For years, the shares of Standard Oil had been depressed by the antitrust litigation, but with the litigation ended, they bounced back to a more normal level....

During the ten years after Standard Oil's 1911 dismantling, the assets of its constituent companies quintupled in value.

I then went on to Michael Dell's bid:

Michael Dell recently announced that he was leading a group of investors (including Microsoft) trying to take the company he started private.
Is Dell truly undervalued, or is Mr. Dell's move simply a sign that his frustration with Wall Street has gotten too great?

I am inclined to believe that Dell is worth far more than the the bid of $13.50 to $13.75 that Mr. Dell and his consortium are offering. Like Rockefeller, there are parts of the company that Dell knows that the Street is greatly undervaluing. Rather than try to convince investors to change their generally bearish view, taking the company private allows the true value of the company to be unlocked.


As you have no doubt read, several other money managers have now entered the bidding war for Dell, although their bids are not too different that Michael Dell's.

What was interesting to me, however, is the comments of billionaire investor Leon Cooperman, as quoted in this morning's New York Times:

Leon Cooperman, the billionaire investor and longtime Wall Street denizen, was railing on Monday about the deal of the moment: Michael Dell’s $24 billion effort to buy out the troubled computer maker he founded.

“Management-led buyouts are a giant case of inside trading by management against their own shareholders,” Mr. Cooperman told me, continuing: “Dell has a moral responsibility to work for his shareholders.

“He’s not doing this because he thinks his company is overvalued. He wants to make money.”


The article goes on to quote famed investor David Einhorn:

David Einhorn, the hedge fund manager, went so far as to suggest, perhaps cynically, that the swoon in Dell’s stock price in the second half of 2012 may not have been unwelcome inside the company.

“Michael Dell probably didn’t mind the stock falling,” Mr. Einhorn said on a conference call with investors recently. “For him, it created an opportunity. Now, he wants to take Dell private, and voilĂ !”

Still, it is also worth noting that Dell has struggled in recent years. Sales have been under pressure, and Dell's operating margin of 7% on revenues last year is not inspiring.  So it is possible that Michael Dell is becoming too emotional about the company that he started in his college dorm room two decades ago.

But I wouldn't bet on it.