All signs point to higher Dell bid

When corporate raider Carl Icahn shows up to stir the pot of a leveraged buyout situation, the pot not only gets stirred but it can be in danger of boiling over.

Such could be the case with his involvement in the Dell Inc. management buyout, for which founder Michael Dell and private equity firm Silver Lake have a $13.65 per share, or $24.4 billion, bid already on the table.

On Thursday, Round Rock, Texas-based Dell came out with Icahn's letter to the board in which he proposed the company offer a $9 per share dividend recapitalization instead of going private. Although he was vague about his valuation, Icahn claimed that shareholders would realize a total value of $22.81 per share, or a 67% premium, to the agreed bid.

To which Dell said, in no uncertain terms: bring it on, or, more precisely, "we welcome Carl Icahn and all other interested parties to participate in that process."

Yet some industry watchers doubt that shareholders will get that much more if they went with Icahn's dividend recap, or a similar plan proposed by shareholder Southeastern Asset Management Inc. last month, although the Texas-based asset manager put its dividend recap wish at $12 per share.

For example, Jefferies & Co. equity analyst Peter Misek said in a research note that the leveraged recap Icahn proposed "could yield a $11.50 to $12.50 stock."

Nevertheless, the consensus among analysts is that Dell will likely get a higher bid that even Icahn can accept. "We think that Icahn would likely be satisfied with a raised bid to $15, which we think would be higher than the potential stock price realized from a leveraged recap," Misek wrote.

A $15 per share bid, Misek said, would yield a 19% to 21% internal rate of return.

Other Dell shareholders would welcome a higher bid as well. "Our conversations with investors lead us to believe that most want a raised bid," Misek noted, adding that "we estimate that about 20% of the holders are now arbs and many of them became involved expecting a bid higher than the current $13.65."

Topeka Capital Markets equity analyst Brian White also sees a higher bid in the making. "We believe too many forces are pushing toward a higher buyout price, thus we are raising our 12-month price target on Dell to $18 from $16," he wrote in a research note.

Plus, there are reportedly other potential buyers kicking the tires of the PC and software enterprise business. Competitors Lenovo Group Ltd. and Hewlett-Packard Co. as well as asset manager Blackstone Group LP are eyeing a bid for Dell.

Of those potential buyers, White said Blackstone is the more serious bidder while Lenovo and HP may just be "taking advantage of the opportunity to review Dell's books." David Johnson, formerly Dell's senior vice president of strategy, recently left Dell to join Blackstone, White noted.

Misek agreed. "After billions in disastrous acquisitions in the last few years, we do not think HP's board has the support to make any large acquisitions at this time," he wrote. "We think Lenovo is too small and risks losing Dell's substantial U.S. federal business due to China-related security concerns."

Indeed, while Blackstone declined comment, a source close to the situation confirmed the firm has signed a nondisclosure agreement.

The go-shop period runs another few weeks, through March 22, but could be extended.

And shareholders might be forewarned to take a long hard look at the figures for the PC world in general, which aren't good. Both Southeastern and Icahn have argued that the PC business, while clearly on the way out as a dominant life form, still has a lot of revenue-driving ability.

"While we could accept the most bearish case in assuming the 'death of the PC,' " Southeastern wrote in its Feb. 8 letter to Dell's board, "even the PC's harshest critics would accept that the PC will be around for more than a few years. A multiple of operating income of 4 gives this business a value of approximately $5 billion, or $2.78 per share. We would note that Lenovo (primarily a PC company), with net income of around $700 million, has a market value of $11 billion."

Worth something, yes, but the decline could be more than shareholders might bargain for.

In the fourth quarter of 2012, Dell came in third for PC shipments, behind HP and Lenovo, according to technology advisory company Gartner Inc.'s analysis, but its negative growth was the sharpest among the computer makers: -20.9% as opposed to HP's -0.5% and Lenovo, which actually managed to grow 8.2% year-over-year.

And that trend is only likely to accelerate, Gartner analyst Mikako Kitagawa said in a research note, driven mostly by a fundamental shift to mobile units, rather than global or regional economic weakness.

So perhaps Michael Dell isn't just lining his pockets with his LBO, as the aggrieved shareholders infer, but rather is leading the business exactly where it needs to go and as quickly as possible, into enterprise hardware and software solutions.

But there is certainly one group that welcomes Icahn's piling bringing more unwanted attention to the deal, and that is Southeastern. The asset manager declined to comment, but someone familiar with the situation said, "they want to kill the deal."