Dell’s Bargain Bin Pricing

Report Document
Report Date: 
Fri, 2013-03-08

On February 5, 2013, Dell announced that Michael Dell and Silverlake Partners were planning to take the company private at $13.65 a share. Their proposed price could undervalue the company and possibly diminish the interest of current Dell shareholders. Dell’s second largest investor, Southeastern Asset Management (Southeastern), publicly opposes the transaction. It released a sum-of-the-parts analysis of Dell’s share price. Southeastern came to the conclusion that a more appropriate share price would be 75% larger than Michael Dell estimated. Unfortunately, even Southeastern did not adequately consider Dell’s intellectual property (IP) optionality in its analysis.

Until the last few years, markets did not give much consideration to the value of IP when determining enterprise value or monetization options. More recently, IP has become a hot topic due to a series of high profile transactions. A startling wake-up call occurred during the bankruptcy of Nortel Networks. Prior to Nortel’s collapse, the value of its IP portfolio received little attention from market analysts. During its bankruptcy in 2011, the IP portfolio sold for $4.5 billion dollars, which accounted for over 80% of the creditors’ recovery. In addition, Alcatel-Lucent is attempting to use its famous Bell Labs IP portfolio as collateral for $2.1 billion in financing. These events are not anomalies but signals which indicate a growing market realization that IP controls and protects the marginal cash flows of businesses.

The case with Dell is no different. Dell is moving out of the PC manufacturing market and into information technology (IT) service markets. Investors need to know that Dell has a strong IP portfolio in these new markets and therefore has the capacity to control marginal cash flows in these sectors. However, since Dell is not currently exercising these controls, they are missing a large opportunity to harvest value for their shareholders. Dell has the opportunity to transact using these market controls and create more value for its shareholders if it so chooses.