/// How Far Will Dell Shares Fall if the Buyout Proposal Fails?

July 22, 2013  |  All Things Digital


If all goes as expected, shareholders of struggling computer company Dell will on Wednesday finally have a chance to vote on the $24.4 billion leveraged buyout proposed by CEO Michael Dell and private equity firm Silver Lake. Every indication so far makes it look like the vote will be close. Even though a few large shareholders representing about 10 percent changed their votes in the waning hours before the first attempt to hold a vote was delayed , there’s no question that both camps in the battle for control of the company will spend today and Tuesday scratching for every vote they can muster. So, what happens if the deal fails? Today, analyst Chris Whitmore of Deutsche Bank Securities weighed in with his own view of the possibilities in a research note circulated to clients. And, similarly to what I wrote on July 5 , he sees a range of not-very-pretty scenarios. Of immediate concern to Dell shareholders is where its share price may go in the event that the 43 percent plurality sides with activist investor Carl Icahn in his quest to derail the buyout. If shareholders reject the buyout, Whitmore says, Dell shares would likely fall, and probably by a lot: “In such a scenario, we would expect shares of Dell to return to valuation levels that existed prior to the Dell-Silver Lake LBO announcement.” Whitmore compared its current trading price — which has been buoyed by the $13.65 buyout price that Dell and Silver Lake made when the offer was first announced — to those of other IT companies, including Hewlett-Packard, EMC, IBM, Cisco Systems and Microsoft, among others. He found that, in the days before the first reports of the buyout plan emerged, Dell shares traded at a price-to-earnings discount of 26 percent when compared to that group. Given where those companies are trading now, Dell’s valuation is, thanks to the buyout offer, trading way above other companies in the comparison group. If it were trading in the same range, Whitmore argues, its share price would be closer to $9 a share, or about 30 percent below the $13 range in which it has been trading in recent weeks. Aside from a possible crash in the share price, Whitmore sees a lengthy proxy fight between Icahn and Michael Dell for control of the company’s board of directors. With the CEO freed up from rules that have so far prevented him from voting his 14 percent of shares on the buyout, Icahn and other shareholders in his camp would be unlikely to elect the full slate of directors they want and need to carry out the recapitalization proposal they have proposed

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How Far Will Dell Shares Fall if the Buyout Proposal Fails?


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