Should You Hold Out for the Last Dollar?

Dana is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There is a rule I learned about business at the shoulder of my late father.

Don't hold out for the last dollar.

Dad did, and it cost him. The path to success in business lies in doing business with the best people you can. It's about the vision to see dollars, not argue over pennies.

This is hard to do when you're looking at a loss, or a potential gain that just faded away. But there's another rule you also need to remember. Don't fall in love with your investments.

So we come to two recent deals that are coming to fruition. If you hold stock in one of these companies, read closely. If you don't, chances are you'll be in this situation soon yourself.


The first involves Dell (NASDAQ: DELL), which founder Michael Dell and Silver Lake Partners want to take private at $13.65/share.

The Fool's Leo Sun offers a great obituary for Dell, which failed to come to grips with a market moving decisively away from mice and Windows toward touch and Android (or Apple's iOS).

But an investor is suing to block the deal and two of the biggest holders of shares say they will vote against the buy-out unless they get a better price.

So should you hold out? Should you buy? Some analysts are now speculating that Dell will have to raise his offer, and the stock is now trading higher than the offer, at $13.80.

How long are you going to wait for how much more money? Because right now you're being offered a 15 cent/share premium on the deal price. I know, maybe you got in for $20/share, or $30/share. It hurts to have to take less.

Don't fall in love with your stocks. 

In order to have an auction, you need a second bidder. Do you really think Hewlett-Packard might want to play Office Max-Office Depot with Dell, buying its smaller rival out so that 1+1=1? Do you think China's Lenovo wants the hassle of buying yet another American company when it insists its goal is pushing into the tablet market, not the old PC market? Do you think IBM is interested in getting back into PC hardware, at this late date?

It's true that this could turn out to be a great deal for Michael Dell. He wants to rebuild the company as a cloud software-and-services company, something more like IBM. He's willing to take big losses in the near term to do that, and knows that public shareholders would howl over those losses. He's a big boy, playing for big stakes, and risking his whole fortune on the proposition that he can pull this off.

It would be great if he could. Dell founded Dell when he was 18. He's now nearly 50. Personally I'm rooting for him. But the hill is a high one, and Dell starts at the bottom of it.



How about Heinz (NYSE: HNZ)? The food giant, best known today for its ketchup, was better known early in the last century for its line of 57 different kinds of pickles, and Joe DiMaggio famously lost a big endorsement deal when his hit streak ended at 56. (Although a campaign built around the idea of “they went one better than me” would have been great.)

Berkshire-Hathaway has joined with 3G capital to offer $72.50/share cash for the company, which now trades at $72.13. The reason why it's not trading at the strike price is because some investors are suing, unhappy with the 20% premium over its recent trading price. 

The fact is that Heinz' price peaked during the dot-com bubble at a little over $53/share. The $60 being bid before the deal was a lot more than that, and the $72.50 being offered by Berkshire-Hathaway (BRK-A) and its partners is a 20% premium on that. Yes, shareholders will miss that fat yield of 2.86%, but they're being more than amply rewarded here.

The roughly $12.5 billion in cash Buffett is putting into the deal is almost a quarter of what's on hand, and most of the risk here is on 3G, which bought Burger King a few years ago and may or may not have what it takes to earn a further premium here.

You know what I might do in response to this deal? Buy some Campbell Soup (NYSE: CPB). Campbell's management considers this deal a “wake-up call” and is almost certain to respond with some moves toward greater efficiency. Watching 3G may inspire others to make a run at Campbell's, which is still controlled by the founding Dorrance family. I think you're better off speculating on that than waiting for the extra 37 cents from Buffett.

Don't Play for Pennies

As the Austin Lounge Lizards sang in their The Me I Used to Be, “just like every fool day trader I thought I was a corporate raider!” You don't want to be that guy. It always ends in tears.

When you invest you want to understand your limits, understand the time value of money, and leave everything else to the experts. When someone offers you a premium for a company, whether it's something you're making money on or losing, take the money and walk away.



DanaFBlankenhorn has no position in any stocks mentioned. The Motley Fool recommends H.J. Heinz Company. 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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