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Dude, You’re Getting Taken by a Dell

The title should ring familiarly, if somewhat vaguely.

It's a flippant takeoff of Dell Inc.'s (NASDAQ; DELL) catchy marketing tag, “Dude, you're getting a Dell.” Seasoned investors will remember the tag delivered by a precocious teenager whose mission was to get his friends (and thus you and me) to buy a Dell computer. 

It worked. By the early 2000s, Dell grew to become the largest PC seller and a raging financial success. During one 20-month period, Dell's stock split 2-for-1 four separate  times. 

You can be sure that Dell's management had no intention of taking the company private back then; it was too occupied with reaping the wealth-amplifying benefits of public financial markets.  

But times change. If someone today were to proclaim, “Dude, you're getting a Dell,” the response would likely be a shrug, or even a “What, no iPad? No Surface?”

Indifference – from consumer and investor alike – has plagued Dell for the past 10 years. After Dell's share price peaked near $56 in early 2000, it's been mostly a slow slog down hill. Only a few months ago, Dell's share price was a lowly $8.69. There hasn't been a stock split in 14 years. 

Dell's growth has stagnated since 2006. Its PCs and laptops have been upstaged by newer, hipper computing and communications devices from Apple (NASDAQ: AAPL), Amazon.com (NASDAQ: AMZN), Samsung, and even Microsoft (NASDAQ: MSFT).

Now, founder, chairman, CEO, and 16% stock owner Michael Dell wants to right a steeply listing ship outside the purview of public opinion. Michael Dell has raised $24.4 billion to do it, and when all is said and done he and global technology investment firm Silver Lake will own the company. 

If I were a Dell shareholder, I would not only be offended but appalled by the offer, especially if I were a shareholder whose cost basis exceeds the $13.65 per share Michael Dell is offering. 

I say that because what Michael Dell is doing is unethical. Anyone who has attended a college-level management course is aware of the first order of business – maximize shareholder value.  How can Michael Dell claim that he's succeeded in that mission?

I hope you appreciate the conflict within Dell Inc.: Insiders want to take the company private. If you want to take a company private, would you prefer a maximized or minimized share price?

Obviously, you prefer a lower price; therefore, you are in direct conflict with the shareholders whose investment value you are charged with maximizing.

The proper action – the ethical action – for Michael Dell is to either step away from the company or to open the process to competitive bidding. This way, assets are best assured of landing in the hands of investors who value them most and who are most willing to pay top dollar for them.   

Dell investors can be forgiven if they doubt Michael Dell most values the assets, or is even capable of maximizing their value. After all, Dell's proposed buyout price of $13.65 per share is 40% lower than the prevailing $24 share price when Michael Dell returned for his second go as CEO in 2006. 

Fortunately, all is not lost. Two large Dell shareholders – T. Rowe Price and Southeastern Asset Management – have balked at the privatization offer and are pushing for a higher buyout price. Perhaps Price's and Southeastern's actions will engender more institutional investor initiative, if not a lawsuit or two. It's really the only hope for individual investors, who are essentially powerless. 

Dell's insider shenanigans aside, I generally look favorably upon companies where insiders are large shareholders. The High Yield Wealth portfolio incorporates a number of investments – like Ares Capital (NASDAQ: ARCC), Calumet Specialty Products (NASDAQ: CLMT), and Diamond Offshore Drilling (NYSE: DO) – where insiders own a meaningful percentage of outstanding shares. 

It's logical when you think about it. The idea of insiders' interest aligned with your own is a good thing, but they must prove that's the case.

A sound dividend policy is one proof.  The portfolio investments I mention are committed to funneling cash flow my way; that suggests an internal ethos dedicated to maximizing value in order to keep cash flowing my way.  (Yes, I realize Dell pays a dividend, but that policy began only six months ago.) 

That said, if the insiders of any company whose shares I owned proposed a buyout when the share price was at a multi-year low, I would protest as loudly as anyone. I would know those insiders failed in their charge to maximize my value. The last thing I would want is to reward them with a takeover on the cheap.

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