Dell Inc. (DELL): What’s Too Risky?

Furthermore, Boston Consulting Group recently recommended a change in Dell’s operating model from “build to order” to “build to stock,” to improve the company’s competitiveness. Icahn’s business plan for the company entails following through on BCG’s suggestions. However, Dell Inc. (NASDAQ:DELL) has acknowledged that this would require a significant increase in working capital.

Dell has recently held approximately 11 days of supply in inventory, whereas competitor Hewlett-Packard Company (NYSE:HPQ) holds 26 days of inventory. If Dell needs to match HP’s days of inventory under a “build to stock” operating model, that would increase working capital (and decrease cash) by approximately $2 billion. Dell would thus have total cash and investments of $9.7 billion, from which Icahn wants to draw $9.1 billion to pay shareholders.

Too risky
Technically speaking, Icahn’s numbers work: Assuming Dell Inc. (NASDAQ:DELL) produces FCF of $1.4 billion in the first half of FY14, the company would have enough cash to cover the payments to shareholders. However, this would leave Dell with less than $1 billion of cash on hand. It would be incredibly dangerous for a company of Dell’s size to maintain such a small cash cushion, especially because of the rapidly changing nature of the markets Dell competes in.

Icahn’s proposal would leave Dell starved for cash and with a heavy debt burden. It would entail selling the company’s captive finance arm, which could make it harder to close some deals. All in all, it would represent a very risky gamble that would leave Dell no margin for error as it navigates the transition to a post-PC world. Compared to this prospect, the all-cash offer from Michael Dell and Silver Lake seems much more attractive for shareholders.

The article Does Carl Icahn’s Math on Dell Compute? originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Fool contributor Adam Levine-Weinberg owns shares of Hewlett-Packard Company (NYSE:HPQ). The Motley Fool has no position in any of the stocks mentioned.

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