Playing the Dell Buyout Is a Bad Idea

 | Jul 16, 2013 | 12:00 PM EDT
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After months of headlines, Dell (DELL) shareholders are finally set to vote Thursday on whether to accept a $13.65-per-share buyout offer from founder Michael Dell and private equity group Silver Lake. Dell shares are trading at $13.21, and advisory firm Institutional Shareholder Services (ISS) recently recommended that shareholders accept the deal -- so a tidy 3% arbitrage profit appears to be on its way in a manner of days. 

But I wouldn't make that trade, at least not from the perspective of cashing out at $13.65. 

Despite the favorable recommendation from ISS, a leading independent proxy firm that many investment fund follow, the voting analysis -- along with the specific conditions of this deal -- serve as headwinds. Here's a closer look at the numbers. 

First, take into account that 16% shareholder Michael Dell cannot vote as part of his agreement with the board. As a result, in order for the deal to pass, it must be approved by a majority of the 84% of remaining shares, or 42.1% of shares outstanding. Investors controlling about 20% of shares outstanding -- consisting of Carl Icahn, Southeastern Asset Management and others -- have stated they oppose the deal. That means about 65% of the remaining pool of available, uncommitted votes must approve of the deal in order for it to go through.

To be sure, votes can be changed at the last minute. For example: Third-largest shareholder T. Rowe Price (TROW), with a 4.4% stake, has indicated that it would vote against the buyout. Yet, unlike Icahn, T. Rowe is a vast institutional fund with thousands of mom-and-pop investors. Collectively, they could decide at the last minute to cash out -- in which case many other funds would likely follow T. Rowe's lead. You never really know in these situations.

Another favorable tailwind for the buyout is that, since it was announced, Dell's share performance has been mediocre. As a result, many smaller shareholders may decide to get out know at $13.65, rather than wait a few years for a higher price. At the same time, Carl Icahn has articulated various ways by which he could offer Dell shareholders more cash sooner rather than later. 

In the meantime, the stock is trading below the buyout price, so the market clearly believes the buyout won't happen or, perhaps, that the deal is likely to be delayed. The Dell board could adjourn the meeting in order to allow for more time to get the necessary votes. 

So the arbitrage trade just doesn't seem worthwhile -- that is, unless the gap between the shares and the buyout offer widens to perhaps 6% or more. If Dell shares fell to $12.80, a very interesting scenario would then open up -- remember, 20% of Dell stockholders oppose the deal because they think shares are worth closer to $20 or more.

For the patient investor, owning Dell is a win-win situation. But, for now, I wouldn't trade on the buyout. 



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