Time to Jump Ship

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

In the stock market every stock gives investors a different rate of return. This makes sense because every investment also has different levels of risk. This is one of the fundamental pillars of financial theory--the reward of every investment is linked to the risk it carriers. The higher the risk appetite of an investor, the higher the opportunity for them to make money, and equally greater are the chances of incurring a loss. I am restating this fundamental stuff to assess the current bullishness on Dell (NASDAQ: DELL).

The PC Industry

The PC market is heading down, and it is becoming more obvious every day that handhelds are the future of computing. The leading PC OEMs have started working on their enterprise segments and improving their hybrid and tablet product lines. Hewlett Packard (NYSE: HPQ) has suffered declining  sales from both its PC and printer segments due to a shift in dynamics within the PC industry. The company has recently launched the cheapest branded tablet on the market. The Slate 7 aims to make the company relevant in the handheld space once again, while PC sales continue to slip.

The largest software company in the world has also started moving away from its PC-centric business model. Microsoft (NASDAQ: MSFT) has recently launched its first touch-based operating system, the Windows 8. It has also released its smartphone operating system, the Windows Phone 8. To further strengthen its options in the handheld market, the company has also launched the Surface Pro and Surface RT tablets. This is a clear indication from Microsoft that it doesn’t see a phenomenal recovery in the PC market coming any time soon, and is aiming to carve a share out of the smartphone and tablet markets.

The Deal

Amongst all this turmoil the founder of Dell has offered to take the company private in a multibillion dollar deal. The stock was trading around $10.80 when rumors started to surface about a potential buyout, and as a result the stock has appreciated by approximately 30%. The highest price Dell traded in the last two years is around $18. I am using a smaller time frame because the PC slump started around 2 years ago, so Dell’s valuations at the start of this century are irrelevant to the argument.

The opposition from major stakeholders has created a lot of argument and controversy around this deal. There is too much ambiguity over the fair price of Dell that the buyers should pay. There are some ridiculous buyout price demands flying out there, ranging from $15 to anywhere in the low twenties. Ironically, everyone’s image of the fair value of Dell has changed overnight since the founder put forward a buyout bid.

The Bottom Line

There is no easy or pertinent way to calculate a fair price for Dell. If the company is being taken private that obviously means the acquirers want a return for the mammoth amount of capital they are investing and the huge risk they are taking by investing in a failing industry. That said, there are differing opinions on this deal, and I will reserve my judgment. But I believe that at these levels the best option for investors is to sell the stock and get out simply because of the high risk attached to the company. There is a possibility that the shareholders will negotiate a higher price for the company, but if the bid is withdrawn the stock price will fall dramatically. Minus the takeover speculation, the stock has been consistently trading under $12.

The situation in the PC industry is getting worse every day, and the last quarterly results of Dell were bad, to say the least. There are chances that the bid price will be slightly increased, maybe somewhere around $15. On the other hand, if the deal falls through the stock can come crashing down to $8-$9, or even lower, if more bad news comes from next quarterly results. Therefore I recommend that investors make good use of this rally and get out. Dell has become a highly risky investment at this stage both due to the sinking PC industry and uncertainty surrounding the buyout deal.

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