To buy Dell (DELL) or not to buy Dell? That is the question -- and it is a question that cuts to the heart of how hard this business is.
You see, Dell, the stock, is precisely where the risk-reward ratio is almost exactly even. If Dell goes private, it will probably be at about $15. That's the most the bankers and Michael Dell can pay without being reckless -- especially since, if a deal is done, there will only be so much cash flow to go around for continued innovation. Michael Dell is anything but reckless, and he will not do a deal that could hurt the long-term fortunes of his company.
But if no deal is made, you'd have to presume the stock will work its way back to $10, because there isn't enough earnings momentum to keep the shares up at current levels. Dell, the company, has spent fortunes in an effort not to merely be an undifferentiated personal-computer maker. But, even so, the fortunes have been spent to design systems that governments and even nonprofit organizations love globally, and right now these are terrible potential clients to be courting. Plus, we know the enterprise is being roiled by the cloud, by the possible integration from Apple (AAPL) and, of course, by a flailing Hewlett-Packard (HPQ) that just might be giving away business to take contracts from Dell.
It's funny -- when the stock was only at $11 on the news, I thought, "What an opportunity." But, the closer it came to $13, the more it ceased to be that opportunity. Instead, if you owned it, Dell became a stock you needed to sell ahead of that day.
But let's strategize about what will happen if the stock goes back to $10. That price would not discount a possible global upward turn in spending, and remember that half of Dell's business is global. It would not factor in the prodigious cash flow at Dell that even makes the notion of a buyout affordable. It wouldn't include the possibility that the U.S. may develop a tax regimen that encourages repatriation -- which would allow the sizable chunk of Dell's overseas cash to be used to fund a buyout.
Most important, a $10 share price wouldn't include the notion that perhaps there's money out there that you and I haven't thought of -- from a big sovereign fund or a wealthy player we don't yet know about. Perhaps such a player will believe in Dell's vision of becoming a one-stop shop for the smaller and medium-size businesses that, frankly, no one really cares about.
Ultimately we don't know where tech will go. Is the personal computer going the way of the typewriter? That could be considered a reasonable prediction, given the more-than-6% decline in PC business last year. Will it be replaced by a smartphone and a tablet? That's certainly possible. Or will it always be the backbone and gateway to the databases and information that every enterprise stores?
If you think it's the latter -- and I am thinking it is -- then at $10 you should be in Dell. I do not believe this stock is going back to $9. Not after this news.
But you'd better wait until it cools down, because Dell is currently in no-man's land. As we know from World War I, that's a very bad place to be.