Late Friday, Mason Hawkin's Southeastern Asset Management, the holder of 8.5% of Dell common shares, issued a letter to Dell Inc. (NASDAQ:DELL)’s Board of Directors announcing/emphasizing its disapproval of the announced Dell private equity transaction valuing the company at $13.65/sh., or $24.4 billion. This equates to ~3.5x EV/EBITDA and ~7x P/E on consensus 2013 estimates.
Michael Dell currently holds 15.7%; T. Rowe Price, Vanguard, State Street, and BlackRock the next four largest holders at 4.4%, 3.6%, 3.6%, and 3.3% of total shares outstanding, per latest filings. Southeastern notes its intent to use any measures at their disposal to oppose the transaction in the current structure including a proxy fight, litigation, and any available Delaware statutory appraisal rights.
The firm would approve of an appropriate value and a structure of a going-private transaction or leverage buyout that enabled public shareholders to continue to participate in the new company via a public stub. Southeastern believes the Silver Lake transaction significantly undervalues Dell’s intrinsic value and represents an opportunistically timed offer.
From a valuation perspective relative to $13.65/sh., Southeastern specifically highlights:
Dell Inc. (NASDAQ:DELL)’s net cash per share after excluding structured debt for the Dell Financial Services (DFS) is $3.64/sh. Southeastern is excluding Dell’s ~$1.4 billion in Structured Financing Debt within DFS as this is collateralized solely by the financing receivables within the programs (long-term structure financing at $975M and short-term financing at $426M exiting October 2012). The DFS book value stands at $1.72/sh.
Dell has spent $13.7 billion on acquisitions, or $7.58/sh. since Michael Dell rejoined the company in 2007. These acquisitions were a focus as the company transitioned away from end computing to an enterprise solutions driven operating model. Using the company’s prior (June 2012) comment that its cumulative acquisitions had generated an average internal rate of return at 15%, Southeastern believes these acquisitions would carry a cumulative value of $12.94/sh.
The firm believes that the x86 server division is worth at least $8 billion, or close to ~1x revenue. Dell’s reported Server and Networking segment revenue stands at $8.9 billion on a trailing 12-month basis. Dell Inc. (NASDAQ:DELL) has highlighted strong growth in its Data Center Solutions (DCS) segment over the past several quarters.
Why Southeastern is Correct Regarding Dell's Acqusitions
Dell’s $13.7 billion in acquisitions has not been followed by any write-downs of purchased goodwill/intangibles. The company’s largest acquisitions included (starting with most recent): (1) Quest Software - $2.4 billion, or 2.9x EV/sales and ~18x EV/EBITDA. This acquisition closed in September 2012. (2) Wyse Technology – some estimate at $1.2 billion acquisition, or over 2.2x EV/sales and has since seen very strong growth, (3) SonicWALL – approximately $1.25 billion, or 6.2x EV/sales, (4) SecureWorks - $612 million, or ~5x EV/sales, (5) Compellent - $880 million, or ~6x EV/sales, (6) KACE Networks - $123 million. (7) Perot Systems - $3.628 billion, or 1.3x revenue and ~12x EV/EBITDA. (8) EqualLogic - $1.4 billion, or 5x EV/sales.
While these acquisitions took place from 2008-2012, the average trailing EV/sales multiple stood at ~4x. In addition to the aforementioned note 15% internal rate of return Dell highlighted from its acquisitions, it is important to highlight Dell’s June 2012 comment that it has seen an average revenue CAGR of ~90% since its acquisitions over the past several years (generating $9.3 billion in acquisition-derived revenue from F2009-F2012).
With these acquisitions, and in somewhat contrast to the Southeastern estimate of a $1.72/sh. book value for DFS, Dell currently carries a negative tangible book value given the significant ($12.7 billion) goodwill and purchased intangibles carried on its balance sheet.
However, even if the acquisitions make the company more valuable, it does not mean that the rest of the company is worth as much as Southeastern believes. Furthermore, Hawkin's will need to get other large shareholders on board.