The alternate universe is sometimes too hard to comprehend. I can't figure out which is right -- the public market or the private one -- because both can't be right at the same time.
That's really the Dell (DELL) deal in a nutshell. Dell is a company in secular decline. It has bought a series of companies, a move meant to make it more of a consultant with hardware vs. a pure personal-computer name. However, the strategy has not brought the company the profitable growth it thought it would get. Margins? Down. Cash flow from operations? Down. Earnings? Down. Revenue? Down.
Plus, let's face it: Dell's doesn't have social, mobile or cloud. It's just a 1990s company that has been trying to fight back for ages, using the parts that everyone else has -- Microsoft (MSFT) software and Intel (INTC) processors and whatever drives are cheapest at the moment. There is very little value added, even despite CEO Michael Dell's endless attempts to make it much more of a service company than a hardware company. The vertical in which he has had the most success is government, and that's a terrible thing to be leveraged to. Universities, too -- again, not so hot. Plus, big European exposure. No thanks.
So when the stock kept going down and down and down, it just seemed like a perma-short, except for that nice balance sheet that could be used to make more acquisitions in order to try slowly repositioning the company.
We all know Michael Dell had talked about taking his company private if it got too low, and I guess $8 per share was too low. But beauty is in the eye of the beholder, and I figured only Michael Dell would seriously entertain the notion that his company would be beautiful to many -- which is why there was no way this thing was going back to the mid-teens on its own.
I figured him for hubris. I figured him for arrogance. But I did not figure the marketplace for ignorance. The stock was correctly priced, given what is happening, at under $10 a share.
So now Dell makes the bid and, incredibly, two others smart, deep-pocketed people want in? To me this just seems insane. It's as if they just hate Michael Dell and are determined to have him pay up for this own company. Surely they don't mean to actually buy it, do they?
Which brings me back to the original question: How can this company, which was worth about $14 billion in the public market, be worth $26 billion in the private market? How in the heck does anyone think the public market could have been valuing this stock that incorrectly? How does anyone think there is that much more value to be had by taking the stock private? Does Dell have some sort of new machine that can run on water? Solar? Does it have a cellphone killer? Does it have the next great device that will change our lives?
Here's what I think. I think we will look back on this one and say the winner was the one who didn't get Dell -- because to get Dell at these prices is to risk losing everything.
I've see this happen a couple of times in my career, when it had been obvious that everyone had lost their sense -- most recently with the Tribune buyout. I know that, theoretically, all three smart teams shouldn't be wrong. But the company's just not worth what they are paying, unless they can fire everyone and still make the same revenue and profit.
That's about what it will take. And that ain't happening.