The Blackstone Group L.P. (BX): Should Investors Ride Dell Inc. (DELL) for a Higher Bid?

Why Icahn’s move helps shareholders

Icahn’s high $15 per share bid is not only the highest current offer, but it is also the highest offer that allows existing shareholders to continue to participate in Dell as a publicly-traded entity. His bid aligns well with a major shareholder, Southeastern Asset Management, which holds shares it acquired at an average price of $16.88 per share.

Southeastern Asset Management seems to have no interest in dumping its shares at a loss. The asset manager’s proxy votes are valuable to any major player seeking to take Dell private. Dell will either have to remain public, allowing further shareholder participation, or more than cover Southeastern’s average acquisition price. The company previously said that it would support a deal in which Dell borrows $9 billion in a dividend recapitalization in which the hardware maker would pay a $12 per share special dividend.

Dell players have tremendous upside with little to no downside. The risk of a deal falling through is quite small, especially with three offers on the table. Additionally, Silverlake, a key partner with Micheal Dell in his $13.65 take-private bid, has left the door open to raising its bid after digesting offers from Carl Icahn and Blackstone.

The best case scenario for shareholders is a lofty take-private bid. Or, second-best, the company will remain public and likely pay out much of its current cash on hand out in the form of a dividend. The worst case scenario, but still a favorable scenario, is that Dell’s cash is used to reduce share count while remaining a publicly-traded company. When it comes to capital allocation, Dell has been a laggard in returning money to shareholders. If it were to use its cash to repurchase shares, the company would offer much better upside leverage.

Is Dell worthy of a flyer? Absolutely. A buyout that allows minority shareholders to participate will undoubtedly unlock much of the value in the Dell brand by correcting capital allocation problems that have plagued the company ever since it began building a cash hoard worth $3.64 per share, not including its finance arm.

The article Should Investors Ride Dell for a Higher Bid? originally appeared on Fool.com is written by Jordan Wathen.

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