The Dell Story Is Far From Done

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Michael Dell's move to take his company, Dell (NASDAQ: DELL) private, for $14.4 billion, is being seen by investors as a done deal.

But it's not.

In early trading the stock was at $13.40/share, far short of the $13.65/share price being offered by Dell and his partners, including Silver Lake Partners and Microsoft. The discount, a little less than 2%, is simply the time value of money, because you figure you won't get paid for some months.

Others now have 45 days to make a competing offer, according to the advisers. Which basically means Dell has put itself up for auction, set an offering price, and is waiting for someone to beat it.

Can someone beat it? Will someone beat it? I think that's fairly likely.

Lenovo might bid

Who? Let's start with its largest PC rival, Lenovo. According to MacroAxis, Lenovo is presently worth $75.23 billion, three times the valuation placed on Dell by Michael Dell and Silver Lake Partners. The same site puts Dell's value at $21 billion, about 16% below the offering price.

So why would Lenovo want to bid? Well, it might want access to the U.S. equity markets, and buying out a public company that's actually operating would give it that access. It might want to get more market share, it might want Dell's cloud operations, and it might even like Dell's efforts in Chengdu, in western China, where operating costs are even lower than China's costs.

How would it come up with a bid in 45 days? The same way Dell did, by using a private equity firm. There are plenty out there who would be glad to help, and which have the capital structure needed to make a deal get done.

Sure, there's risk, nationalistic risk. Americans won't like the idea of a Chinese company buying a big American computer maker. Politicians are going to squawk. Which means you need a handsome premium to succeed, maybe a price as high as $30 billion. Can Lenovo extract that much value from Dell's pieces? I think it can.

IBM or Oracle might bid

Who else might bid? IBM (NYSE: IBM) might bid. This deal is bigger than anything IBM has taken on in quite some time, but the current bid is only a little more than 10% of IBM's market equity. It could easily come up with a cash-and-stock bid that's superior to the present offer and which doesn't exhaust its cash reserves.

Now, why would IBM bid? After all, it got out of the PC business when it sold to Lenovo. Again, I like the China play. Dell is mainly a contract manufacturer of servers and clients, which is right up IBM's street. Dell's clouds run OpenStack, not Windows, which would make them more compatible with what IBM is building in its own network.

Who else might play? Oracle (NYSE: ORCL) might play. It has the financial wherewithal, and it can easily hive-off anything from Dell it doesn't want, perhaps selling the PC business to Lenovo. Dell would give Oracle a “real” cloud, not the faux cloud it's building, along with a global service footprint and a lower cost structure than it presently has with the hardware operations purchased with Sun Microsystems.

Kick the tires

All of this is speculative. I have no evidence any of this is happening. But the “for sale” sign is out, and if you want to speculate you have reason to.

At the very least, I can guarantee you that IBM and Oracle are both going to be kicking the tires here, and might well be doing so at Silver Lake's invitation. If Lenovo does come in with a bid – and they're the most likely alternative buyer – Dell is going to need a white knight.



DanaFBlankenhorn owns shares of International Business Machines. The Motley Fool owns shares of International Business Machines. and Oracle.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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