Activist investors like Carl Icahn, T. Boone Pickens, Daniel Loeb and others make a good portion of their livings through the various processes of mergers, acquisitions and liquidations. Their actions or even intentions alone can motivate thousands of ill-prepared investors to “coattail” these trades in an effort to capitalize on what they believe could be a home run. More often than not, it’s either too late or the process turns out to be a long drawn out one in which the investor bails on as their patience and pockets run thin.
While I believe that DELL will most likely go private, its fundamentals are going in the wrong direction, analyst are jumping ship on earnings growth estimates and I don’t think that even the great Icahn can improve the situation in short order.
More importantly, you should see the caution flags here and heed them unless you are an expert in merger and acquisition analysis. For most investors, it might be a better move to avoid Dell and look to companies with better ranking and positive earnings growth like
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Michael Dell wants to take the world's third largest PC maker private for $24.4 billion. It’s his belief that a needed transformation within the company would be done best without the meddling, scrutiny and intrusiveness of the public markets (I agree here).
Michael Dell and Silver Lake agreed in February to buy out shareholders at $13.65 a share; shares were trading at just above $10 at the time and had traded as low as $8.69 in November.
Icahn and Southeastern Asset Management (another major shareholder) are fighting Dell’s buyout offer, saying it’s too cheap for a company trying to become a major provider of enterprise computing. They are proposing new leadership and additional cash or stock for shareholders (obviously they own shares much higher). They drew up a deal where shareholders have the option to either receive $12 per share in cash or $12 in additional shares valued at $1.65 per share.
DELL recently reported that net income fell to $130 million from $635 million a year earlier. Excluding certain items, income was down 51 percent to $372 million, or 21 cents a share, from $761 million, or 43 cents a share, a year earlier. It missed the Zacks Consensus by 38.35%; expectations were for 34 cents in the quarter.
Margins on a GAAP basis slid to 19.5 percent from 21.3 percent a year earlier, as total operating expenses climbed 12 percent. Revenue in its fiscal first quarter ended May 3 fell to $14.1 billion, higher than the average analyst estimate of $13.5 billion.
Shares are currently trading at 13 times forward earnings assuming flat sales growth and an earnings increase of 2% in 2013. Looking at the trajectory of analysts’ expectations, I think that might be a stretch.
Considering that Icahn rode Netflix stock up 135% for an $800 million in estimated paper profits one would think he might want to just let this deal go. But based on past experience it’s not his style to just walk away, but for many investors that might be the best medicine here.
If you are looking for a turnaround, you might have a better shot exploring Hewlett-Packard, although I'd wait for a pullback as its shares have already risen by leaps and bounds.
Jared A Levy is a trader and author of “Your Options Handbook” and “The Bloomberg Visual Guide to Options.” He has two portfolio recommendation services: Zacks Whisper Trader and Zacks TAZR Trader. Follow Jared A Levyon twitter at @jaredalevy.
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