Dual role as leader and investor creates conflict

By DAVID MOON, Moon Capital Management, LLC
February 24, 2013

Michael Dell turned 48 years old yesterday. He wants his company back and at the price he’s offering, it would be a great gift.

Dell Inc.’s founder, Chairman, Chief Executive Officer and namesake has joined forces with private equity firm Silver Lake Partners to offer the company’s shareholders $13.65 for their shares. Twelve weeks ago the stock traded near $9 per share.

A little more than 12 years ago, however, the stock was $54.

In 2004 Michael Dell left the company he founded 20 years earlier (as a student at the University of Texas – prior to dropping out) to do whatever a person does when he’s 39 years old and one of the 50 wealthiest people in the world.

In the three years following his departure, the price of his stock (along with that of the other Dell shareholders) declined almost a third.

Like Steve Jobs returning to Apple, Michael Dell realized that his company needed him.

Unlike Steve Jobs’ return to Apple, however, Dell stock fell another 50 percent in the year following Michael’s return the helm.

A thorough discussion of Dell’s finances, valuation and opportunities would be lengthy. But no one knows the company better than Michael Dell, and he realizes that he can make a lot of money if he can buy the remaining 86 percent he doesn’t already own for $13.65 per share.

The bigger lesson here isn’t about whether or not the age of the PC has passed, the surprising sources of Dell’s operating income or if the company is an attractive investment at this price.

It is about the terribly conflicted nature of these types of transactions.

Obviously Michael Dell thinks the stock is worth more than $13.65, or he and his partners wouldn’t be willing to spend $24.4 billion to buy everyone’s shares at that price.

Like most informed analysts, Michael realizes that the company is likely worth well in excess of $20 a share. But who is going to reap the benefit of the difference between the $13.65 offer price and the underlying value of $20 or $25 per share?

Michael Dell, the Chairman of the Board, is supposed to be getting that profit for the current shareholders.

Michael Dell, the takeover investor, is trying to get that profit from the current shareholders.

The common management defense in these situations is to hire an investment banking firm to provide an independent appraisal.

Independent. Snicker, snicker. That’s a lot like relying on the car salesman for an independent valuation of your trade-in vehicle.

Dell can defend himself by noting that other potential acquirers have the ability to make a competing offer for the company – but who wants to get into a losing bidding war with the group that controls the board and knows more about the company than anyone else?

Without the buyout offer, the stock might still be trading below $10 a share. But there are way too many conflicts on Wall Street – and few are as blatant as this.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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