BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Dell and Clearwire, Two of a Kind, With Inside Takeovers at Half What They Are Worth

Following
This article is more than 10 years old.

 

English: Dell Logo (Photo credit: Wikipedia)

As the weeks roll by, both Dell and Clearwire insiders are trying to ram unwanted deals down the throats of "outside" shareholders who feel they aren't getting fair value.  Wall Street bankers are always evolving new permutations on the deal space.  Now that we have the "Too Big to Fail"  banks in that mix, a new wrinkle is a bank, like JP Morgan, agreeing not to provide the money for the Dell deal in order to be considered a book runner, if I read some of  the thousand pages of documents filed just at Easter weekend correctly.

What is interesting in both these deals is the degree to which the averages have become a blend of stocks more than ever.  Both prove that it is a market of stocks and not a stock market.  The Dow and S&P are at all time records and here is Dell selling for 25% of its peak in March 2000 and Clearwire selling at a tiny fraction of the $17 at which it raised money from its early partners like Intel and the cable companies.

What is also interesting is that in both cases the alternatives to the "original" offers they received from "insiders" are not really firm offers.  Charlie Ergen has offered to maybe buy Clearwire altogether. Or maybe buy 25%. Or maybe partner with Sprint after the deal.  Supposedly, CLWR's special committee is to represent the best interests of shareholders.  But, Sprint is its largest and dominant shareholder.  A year or more ago, Sprint renounced its controlling interest in Clearwire. It then was worried that a default, at Clearwire Sprint  was doing its best to help along if not cause outright, might in turn trigger payment requirements it couldn't meet at Sprint itself due to cross collateral covenants in its own debt.  Once it figured out it was not in its best interest to force bankruptcy on Clearwire because it might lose control of Clearwire's delicious frequency position, Sprint decided to push the stock down and then reacquire control. It spent about 18 months on that endeavor.

One condition of DISH and Charlie Ergen's "sort of "  non-binding offer was that Clearwire not take any more highly dilutive money from Sprint.  Each $80 million monthly tranche is convertible into shares at $1.50 per share.  It only increases Sprint's control of the vote.  Yet after skipping the first two tranches, Clearwire has now taken the money in March and April.  Even so, they say they are still speaking about options with DISH.  Molasses might be the best description of what is going on.

Deep pocketed Crest Financial is proceeding on more than one front. It is proceeding with its case against Clearwire, its management,  Sprint and others in the Delaware Chancery Court. While not granted fast track to stop the merger, the Delaware Court does believe there are issues worthy of adjudication in the demonstration that minority shareholders of Sprint have been abused in this transaction.  The damages, if any, will come in future years long after stopping the merger has become moot. Crest has also filed with the FCC to block the merger on several grounds including the granting of control of a huge swath of U.S. spectrum at 2.5 GHz  to a foreign entity, Softbank, controlled by Masayoshi Son.

On another front, Softbank and Sprint asserted this week they will not use Huawei (Chinese) equipment in the buildout of its network. There is grave concern in the U.S. and in Canada which recently acted to block Huawei equipment for use in its country in the construction of its nationwide network over security concerns. It is noteworthy that Crest is acting in its own behalf and not as the leader of a class action which imposes various obligations on it which it has chosen not to undertake.  In the meantime, Sprint insists it will not raise its offer price for minority shares and even with the acceptance this week by Clearwire of more money, the stock price didn't waver a noticeable amount. the price has remained steadfastly in the range near $3.24 per share, about 9% above the Sprint offer of $2.97.  Some cadre of investors think that price is not going to win over minority shareholders who know that the true value of the spectrum is two or three times the price on offer.  Crest believes it can prevail in the proxy fight in which more than half of the shares not owned by Sprint must vote in favor of the deal.  It has requested a shareholder list to aid it in its efforts. There is little Clearwire can do to block that request.

In the Dell situation, Barron's this week points out that one firm, one that apparently initially paid much higher prices for some of the shares it owns above $20 per share, is insisting that even if you only value the PC business at $2.78 per share, they constructed a sum of the parts value for Dell at $23.72 per share.   In the Dell case, the original firm that broached the idea of going private with Michael Dell last summer was frozen out of the deal. In the literally 1000 pages of documents filed in the proxy statement, Mr. Dell told Southeastern Asset Management that he would consider the idea.  He surely did but used their concept to proceed with Silver Lake Partners and not Southeastern.   This is the big leagues and when it comes to doing what is best for MOI, Mr. Dell  chose to take Southeastern's concept and rework it to suit himself,  leaving them out in the process.  Barron's suggests that with Carl Icahn and  Blackstone Group  now in the bidding the plot has thickened a bit.  You can regard the Blackstone offer as the Trojan Horse bid as the recently departed  head of Dell's acquisition strategy is now at Blackstone and spearheading that effort.  He knows what is there to buy better than most.

Barron's cover story this week suggests that  Michael Dell and friends aren't  likely to  be able to steal the company at $13.65. That's  close to half its estimated present value with little included for the crumbling PC business. On the other hand, it is noteworthy that none of the other offers rise to a price consideration that is much higher than the $13.65.  Besides all those massive fees that the deal machinery on Wall Street stands to make over this particular one, the bidding investors must see still see a sizeable return to make it worth their interest. Whether Micheal Dell has the skills or not to lead the company going forward also remains to be seen. Nothing he's done in recent years has provided the magic formula which is why we are at this particular Dell crossroads.

Joan E. Lappin CFA    Gramercy C apital Mgt. Corp.

Mrs. Lappin, Gramercy Capital and its clients own shares in Clearwire at this time but not in Dell. For information about our firm, info@gramercycapital.com. To follow Joan, click on the button on the top of this page. You can also follow her on Twitter: @joanlappin.com

Joan Lappin will be speaking at the NY Public Library Science Industry and Business Branch on Tuesday, April 9th. Or meet her at the Sustainatopia Conference in Miami where she will be moderating a panel on Media on April 17th.  Come by and say hello.