Value Hunt Continues: Dell MBO or Dividend (DELL, HPQ, AAPL)

Dell Inc. (NASDAQ: (NASDAQ: DELL) is seeing some unusual activity ahead of its earnings report.  Perhaps more interesting is what is causing the move.  There are a couple of rumors that either Dell will go private or that the company is about to embark on a very large special dividend.  Rumors of Michael Dell taking the company private are not new.

What is interesting here is just how much “value stock” there is in Dell Inc.  We recently highlighted how both Dell and Hewlett-Packard Co.  (NYSE: HPQ) were in a chase as to which offered the most value when we did a “Deep Value Tech Review” that covered several other key tech stocks.  That value gap is still a race, and it just depends from here how the two tech giants perform against each other.

Today’s run is being credited to a Bloomberg report that Lee Ainslie of Maverick Capital Management LLC said this is what is being considered.

Dell finds itself in a strange spot from the 1990’s.  It was the greatest PC growth engine company out there. Now it is Apple Inc. (NASDAQ: AAPL) that is the hot kid on the block.  Dell has been far slower to migrate into IT services and consulting and Dell is still mainly considered a plain vanilla PC company by investors and analysts alike.  The weakness has also been a lack of leadership in the market as the PC market is now very competitive and the move into smartphones, netbooks and tablet-devices has not been dominated solely by Dell in a world of “good enough computing”  power.

If you blend the Jan-2011 and Jan-2012 fiscal earnings estimates from Thomson Reuters,  De;; hardly trades at 10-times forward earnings expectations.  The big question is whether Michael Dell can even raise the cash for a management buyout of this magnitude.  The market cap is over $27 billion and at $13.95 the stock’s 52-week range is $11.34 to $17.52.  A deal of this magnitude would require many bankers and private equity buyers would almost have to be a  key part of this deal.

There are many holders who have been ‘long and wrong’ here that own the stock well above $20.00.  Whether there are enough of them to block a  deal or demand a super-premium is another issue.  Dell traded above $25.00 as recently as mid-2008.

The reaction has Dell trading up 1.6% today and volume is over 34 million shares versus an average volume of about 23 million shares.  Chances are that if this was a real rumor on a buyout that there would be a larger gain.  As for the thought of a large dividend, we already noted how much cash is on the books at Dell in our tech value analysis.

As with all such rumors, until you see a press release from the company or until you hear that a deal is imminent then a rumor is a rumor is a rumor…

JON C. OGG