Updated from 12.22 a.m. ET with Dell's announcement about the two new offers, details on the offers, market close information and a contrasting viewpoint from Topeka Capital Markets analyst Brian White.
NEW YORK ( TheStreet) -- Investors playing shares of Dell (DELL - Get Report) in hope that a rival takeout bid will trump the bid by Dell founder and CEO Michael Dell and Silver Lake Partners are taking plenty of risk for relatively little potential reward.
Dell's shares closed at $14.14 Friday, exceeding the offer of $13.65 a share Michael Dell and Silver Lake Partners, that the company's board of directors agreed to on Feb. 5.Michael Dell's takeout deal is subject to a vote by shareholders and was originally subject to a 45-day "go shop" period, under which the board of directors committee that approved the takeout agreement were free to negotiate an alternate deal with other bidders. Just before the "go shop" period ended on Friday, Carl Icahn and Blackstone (BX - Get Report) each told Dell's board they were planning to make competing offers for the company, buying them four more days to negotiate a new takeout agreement, according to the Wall Street Journal. With Dell's shares exceeding the original takeout offer by 4% at Friday's close, investors were obviously expecting either Michael Dell's bid to be increased or for a rival bid to prevail. But the two new offers offer little additional upside for the shares. Dell early on Monday confirmed the two new offers in a press release that included the Friday letters from Icahn and Blackstone. Icahn's merger offer includes "an aggregate $5 billion equity commitment," including the purchase of $2 billion worth of the "surviving company's" shares at a price of $15.00. Icahn said in the offer his proposed deal for Dell "contemplates less total leverage on the Surviving Company than under the February 5 Merger Agreement." TheStreet's Antoine Gara on Monday argued that Icahn's offer was the best bargain for investors, making the most use of Dell's excess cash. Blackstone said it was "prepared" to acquire Dell for $14.25 a share in cash and stock, "subject to a cap" on the cash portion.
It's clearly time to sell Dell's shares, as even a full takeout offer for $15 a share -- which exceeds what Icahn and Blackstone have offered -- would be a gain of just 6% from Friday's close, while the shares have already risen 39% year-to-date. Another reason to bail at this point is that the initial bid of $13.65 a share could still prevail, which would be a 3% loss from Friday's close. Even worse, it's possible that Dell will remain publicly traded, in which case the shares could slide right back to their year-end trading range of around $10.00. Dell's fiscal 2013 ended on Feb. 1. For fiscal 2013, the company reported operating earnings of $3.973 billion, or $1.72 a share, declining from $5.135 billion, or $2.13 a share, in fiscal 2012. Net revenue for fiscal 2013 was $56.94 billion, declining from $62.071 billion the previous year. Dell's consumer business contributed 19% of net revenue during fiscal 2013, but the unit posted an operating net loss of $11 million for the year, reflecting the continuing pressure on the company's PC business. A bright spot for Dell was that its revenue from services and software increased slightly, to $12.196 billion in fiscal 2013, from $12.165 billion in fiscal 2012. The overall pressure on Dell's income and earnings is reflected in a relatively low valuation for the shares, despite the run-up this year. At Friday's close, the shares traded for 8.3 times the consensus fiscal 2015 earnings estimate of $1.71 a share, among analysts polled by Thomson Reuters. With what appears to be weak prospects for earnings growth over the next couple of years, Dell's shares aren't compelling for long-term investors expecting the company to go on operating as a public entity. For those playing the take-out, it would appear that the gains are already baked-in. Topeka Capital Markets analyst Brian White has a different opinion on Dell's takeout prospects, saying in a report on Monday that "a higher buyout bid is in the cards and we continue to believe that an $18.00 buyout price for Dell makes sense." The analyst rates Dell a "buy" with a price target for the shares of $18, matching what he believes the potential purchase price to be. When considering Icahn's offer, White wrote that "the opportunity to maintain a stake in Dell could be welcomed by investors that want to participate in the turnaround at the Company." While saying that a bid of $18 a share would "make sense," White said that "it is unlikely that this price level will occur in the first round of bidding."