My analysis on Michael Dell’s offer to buy $DELL

How many ways can I say, "Take the offer and run?"

I will admit that my analysis tools are not well refined for determining the price of a company that is as poorly managed as DELL [stckqut]DELL[/stckqut]. I have developed my tools to try and deduce an appropriate price for truly well-run companies. Since I never invest in poorly-run companies, I never wanted to spend much time in fine-tuning those rules.

I currently think that Dell Inc. is over-valued at its current price. I wouldn't buy the stock at this level and I would accept Mr. Dell's offer if I owned any of the stock (which I do not). I understand that there is hidden and untapped value in the company however that value is only going to be unlocked in a private setting. Trying to make Dell Inc. a well-run company after it has floundered for so long is virtually impossible. Mr. Dell and his partners are likely to change many facets of the company that would be very painful in the public market of quarterly announcements. This is very necessary as the stock would likely be hammered during all of the changes.

So while I understand various institutional investors wanting to get a bit higher return, the average individual investor should take the money and run. If the institutional investors get too greedy then Mr. Dell’s buy-out may not work and then the stock price will almost certainly drop.

There are better companies to invest in then Dell Inc. Even if the company was well-run (which it isn't), I wouldn't hold the stock above about $9.40. Mr. Dell is offering $13.65 for the stock. Somehow, Southeastern Asset Management says the company is worth $24 per share. I don't see the company hitting that price as a public company any time soon. If they really think the company is worth that much then they should do the leveraged buyout and show how great they are at managing!

Since my tools for poorly-run companies are not well-defined, I may be undervaluing the stock. In that case, I could see $13.65 as a reasonable premium. I cannot see the price being justified too much above that.

For your enjoyment, here is a recent report on the company:

Dell Inc. ($DELL) Confident Investor Rating: Poor

Company name Dell Inc.
Stock ticker DELL
Live stock price [stckqut]DELL[/stckqut]
P/E compared to competitors Good

MANAGEMENT EXECUTION

Employee productivity Poor
Sales growth Poor
EPS growth Poor
P/E growth Poor
EBIT growth Poor

ANALYSIS

Confident Investor Rating Poor
Target stock price (TWCA growth scenario) $4.33
Target stock price (averages with growth) $6.08
Target stock price (averages with no growth) $8.54
Target stock price (manual assumptions) $9.37

The following company description is from Google Finance: http://www.google.com/finance?q=dell

Dell, Inc. (Dell) is a global information technology company that offers its customers a range of solutions and services delivered directly by Dell and through other distribution channels. Dell is a holding company that conducts its business worldwide through its subsidiaries. The Company operates in four segments: Large Enterprise, Public, Small and Medium Business, and Consumer. Its Large Enterprise customers include global and national corporate businesses. Its Public customers, which include educational institutions, government, health care, and law enforcement agencies, operate in their own communities. Its SMB segment is focused on helping small and medium-sized businesses by offering products, services, and solutions. Its Consumer segment is focused on delivering technology experience of entertainment, mobility, gaming, and design. In April 2012, it acquired Clerity Solutions. In September 2012, it acquired Quest Software Inc. In December 2012, it acquired Credant Technologies.

 

Confident Investor comments: At this price and at this time, I do not think that a Confident Investor can confidently invest in this stock.

If you would like to understand how to evaluate companies like I do on this site, please read my book, The Confident Investor.

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