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If Dell Deal Fails, Look Out Below |
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By Steven Russolillo
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— ZUMAPRESS.com
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If the closely
watched deal to take
Dell Inc. private doesn’t pass, the stock price could be in for an ugly
tumble.
Shareholders are
scheduled to vote this Wednesday on
Michael Dell
and Silver Lake Partners’ $24.4 billion buyout offer, after the PC maker
delayed last week’s vote, which at the time looked likely to fail. The
company and its potential buyers are now trying drum up enough support of
the deal through renewed sales pitches.
“By all accounts,
it appears the vote to take Dell private will be a nail-biter,” says Chris
Whitmore, research analyst at
Deutsche Bank.
Should the
$13.65-a-share buyout fail, he predicts the stock would fall to about $9.
“If shareholders
vote down the deal, we’d expect a proxy fight to ensue and the future of
Dell (and its strategy) to become highly uncertain,” Whitmore says.
Shares closed
Friday at $13.14 and have traded in the $13-and-$14 range throughout much of
the five-month fight for the technology company. “We see roughly 30%
downside to Dell’s share price if the deal were to collapse,” he says.
Here’s a look at
Dell’s stock price over the past 12 months, including the spike earlier this
year after reports initially broke about Mr. Dell’s intentions to take the
company private.
Last week, Dell and
Silver Lake appeared to fall short of the 751 million shares they needed to
win approval. Only about 77% of the eligible shares voted, a turnout low
enough to spook the company into adjourning the vote for fear of failure.
Since shares not cast count as no votes, the buyout group has targeted a
turnout of 85%. Wednesday’s count will come down to whether an additional
days of cajoling by the buyout camp is successful at increasing the turnout.
If the proxy
solicitors charged with trying to sway holders for Mr. Dell and Silver Lake
fail to get out the vote or flip a few key votes to their side, as they
appeared to just ahead of last week’s deadline, the vote could be in trouble
again.
In addition to the
drama surrounding the deal, the fundamentals surrounding Dell’s core PC
business look troublesome. “Insights gleaned from
Microsoft's recent earnings call paint a concerning picture for
medium-term PC corporate demand,” Whitmore says.
For instance,
Microsoft last week said about 75% of its installed base has moved from XP
and onto Windows 7, “which suggests the low hanging fruit in this corporate
PC refresh cycle has been peaked,” Whitmore says.
“The decline of
this relatively high margin segment of the PC industry and ongoing tablet/smartphone
cannibalization in both the consumer and corporate PC market will likely
translate into several years of declining revenue and margin pressure across
the PC industry,” Whitmore says.
“With a proxy fight
looming in a ‘no’ scenario in the Dell shareholder vote and PC industry
fundamentals under considerable strain, we’d think twice before voting
against a bird in the hand.”
–David Benoit
contributed to this post.
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