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The Worst Piece of Corporate BS

by Jeffrey Bronchick, CFA on February 11, 2013

The proposed management buyout of Dell is an abomination of corporate governance and decency on an extraordinarily large scale. While we have been too busy losing money in Hewlett-Packard to own Dell shares, I will take the liberty of being incensed for its shareholders. To wit:

  1. ANY management-led buyout of a public company is a complete violation of the most elemental sense of corporate governance, if not de facto insider trading. There is only ONE reason why management teams offer to buy out public shareholders—they think the stock is worth more than the price they are paying. While it is inaccurate to always infer greed as opposed to a distinct possibility of mere idiocy or incompetence (Tribune buyout?), in the case of a management-led buyout, I think we can default to the former.
  2. It is an UTTERLY flawed notion—that is nonetheless touted as commonly as the merits of breathing—to believe that “the premium to the last trade was 24 percent so this is a good thing for you, Mr. Shareholder.” The only relevant issue is the relationship between the bid price and the present value of a rational business plan. What is clearly the operational strategy here—and is usually the case in a management-led buyout—is to figure out “what is the lowest price that can be paid that leads to the smallest number of lawsuits? If Michael Dell and I can agree (which I think we do) that this is not the next Tribune, then shareholders are being hosed.
  3. The fourth biggest lie in the world is, “I can’t manage a turnaround while public, so it needs to be private so we can really do what needs to be done.” Let’s ignore for a minute the series of strategic miscues deftly executed by Mr. Dell since his return to active management that so far has created no economic value for shareholders (a 44 percent drop in the share price) and think bigger. Are we to believe that it is impossible for a public company to massively cut costs, make acquisitions that are dilutive in the short-run but have long-run benefits, or divest or spin-off divisions that are non-core? Does the hundreds of billions of dollars of market value in the technology and medical sectors represent a support statement for the idea that the market doesn’t understand the concept of spending money upfront for R&D expenses to create long-term value? Is it possible to suggest that the New York Times Business Section is completely wrong and that a public company management team cannot pay itself well enough to compete for talent against private equity-run companies? Can someone really stand in front of investors at a press conference and say that a public company cannot take on a leveraged balance sheet and maneuver around the tax code for the benefit of shareholders? (John Malone, where art thou?)

The simple fact is that Mr. Dell has mismanaged his namesake firm (as in operating at half of the margins of the alleged biggest dopes in the world at HP!) and now wants to petulantly escape the glare of failure. He has neatly partnered with Silverlake Partners, a firm that has made a very nice living picking the pockets of public shareholders in a number of similar actual or proposed deals. And once you get past the shame and outrage, the irony of this deal is that the natural solution for what ails Dell is very simply a management change.

I would be the first to admit that the financial press often has no idea what really goes on at a company, but my nose says the following cut from a recent Wall Street Journal article is right on the money:

A buyout would be an admission by Mr. Dell that the changes needed to get his company’s revenue and profits growing again are too difficult to pull off while under Wall Street’s glare. At the same time, the buyout will ensure that the 47-year-old is the one who gets to oversee any changes.

Overall, interviews with more than 10 current and former Dell executives, plus other people who know the CEO, paint a picture of a man who appears increasingly worried about his legacy and whether the board would try to push him aside. These people said it has been years since Mr. Dell showed the enthusiasm he did when he reclaimed the title of CEO in 2007 after a short period where he served only as chairman of the PC maker.

Now with Dell’s share price down more than 44% since Mr. Dell’s return and the company on the precipice, the people said the move to take the computer maker private is as much about Dell the man as Dell the company. “It’s pretty simple: His (Michael’s) name is on the door,” said one former Dell executive.

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