Why Dell Trades at a Merger Arbitrage Discount

Despite the Carl Icahn efforts to force a higher price, Dell’s buyout now looks capped at $13.65 rather than floored at $13.65. You have to assume that the earnings results are going to be very weak on Thursday. Still, Michael Dell will face a serious fight on his hands if he were to lower his $13.65 share price buyout offer. His board has been in support of his offer from the start, but pulling out would almost certainly force his board of directors to stage a coup.   That being said, investors just do not expect that a higher buyout is coming here.

Carl Icahn looks like he wet the bed here thinking he could just muscle his way into Dell to force a higher buyout or to force a recapitalization that would leave a large portion of the company public. Remember when we warned you about the activist investor bubble? Now it looks like holders of the Icahn Enterprises, L.P. (NASDAQ: IEP) units under Carl Icahn could lose some of those big profits if Icahn remains unable to shake Michael Dell into working a better deal.

Microsoft Corporation (NASDAQ: MSFT) is still tentatively involved in a preferred share of sorts, but The Blackstone Group L.P. (NYSE: BX) backed away when it witnessed the decline of the trends in the PC business.

Dell shares are trading at $13.47, some 1.33% under the $13.65 per share buyout price. That leaves very little room for the so-called merger arbitrage investors who take the risk that a deal cannot close.

Dell shares are up 33% in 2013. Rival shares in Hewlett-Packard Co. (NYSE: HPQ) are up by 48% so far in 2013. H-P is in a turnaround and is too large to be acquired, yet Dell’s turnaround and buyout only have the stock up by about two-thirds as much as that of H-P.

The IQ Merger Arbitrage ETF (NYSE: MNA) is betting on the Dell buyout and has about 7% of its assets in the fund. Its investors are hoping that all remains well with the Dell buyout after earnings. With a discount of only 1.3% or so, Wall Street’s vote is that Michael Dell is going to close the deal originally proposed and not for a single cent higher.