Peter Misek, CFA, CPA an analysts at Jefferies believes “that competitors and investors are using the go-shop process to look at Dell Inc. (NASDAQ:DELL)’s books but that a competitive bid is unlikely to emerge”. Apart from antitrust issues, he thinks Hewlett-Packard Company (NYSE:HPQ)’s board will have a tough time making an acquisition of this size and that Lenovo is too small. Additionally, a Southeastern counterbid would be difficult to complete without Michael Dell’s involvement. Peter thinks Carl Icahn could be satisfied with a raised bid and a strategic bid is unlikely.
According to Gartner, in Q4:12 Hewlett-Packard Company (NYSE:HPQ) had 16% global market share followed by Lenovo at 15.5% and Dell Inc. (NASDAQ:DELL) at 10%. In the U.S. the shares were HP 27%, Dell 19%, Apple 12%, and Lenovo 8%, which we think poses challenges for an HP bid. Plus after billions in disastrous acquisitions the last few years, additionally HP’s board likely does not have the support to make any large acquisitions at this time. Lenovo is too small and risks losing Dell’s substantial U.S. federal business due to China-related security concerns. While a break-up of Dell Inc. (NASDAQ:DELL) would increase the probability of a strategic investor buying a portion of the business, but this is unlikely due to the size of the PC business and Michael Dell’s desire to lead a shift toward enterprise hardware/software.
Leveraged recap could yield a $11.50-$12.50 stock. Carl Icahn would likely be satisfied with a raised bid to $15, which Peter thinks would be higher than the potential stock price realized from a leveraged recap. Even if the deal does not get shareholder approval, he views the leveraged recap as the worst-case scenario.
Why a $15 bid is likely, Peter states:
Our conversations with investors lead us to believe that most want a raised bid, but that they are also cognizant of the lack of competing bidders and of the secular headwinds facing Dell Inc. (NASDAQ:DELL)’s PC business. Also, we estimate that about 20% of the holders are now arbs and that many of them became involved expecting a bid higher than the current $13.65. Overall, we expect enough would be satisfied with a $15 bid to get the deal approved and estimate that $15 would yield a 19%-21% IRR.
CNBC news story reported that Carl Icahn has taken a 100 million-share position (or nearly a 6% stake) in Dell and supportive of our view that a buyout price above $13.65 for Dell will be needed to complete this deal. We believe too many forces are pushing toward a higher buyout price, thus we are raising our 12-month price target on Dell to $18.00 from $16.00.