Are Dell’s shareholders on Xanax?

September 2, 2010

Are Dell’s shareholders on Xanax? The company has finally bowed out of its mad bidding war for 3PAR. Yet its investors displayed neither much concern about overpayment nor relief about the deal being dropped. After a decade of scandals, missed opportunities and dismal performance, they may have stopped caring.

They had reason to worry. Dell appeared desperate to win storage company 3PAR. It raised its offer multiple times to match bids from Hewlett-Packard. HP’s $2.1 billion winning bid, which Dell came close to matching, was more than three times 3PAR’s undisturbed market capitalization and values the company at almost 10 times estimated sales. Based on a typical tech premium of around 40 percent, HP appears to have overpaid by more than $1 billion.

Dell’s investors should be happy to have avoided winning 3PAR at a price that would have been about 4 percent of Dell’s market capitalization. Moreover the company received a $72 million break fee for its troubles. Yet the stock only rose about 2 percent in mid-day trading. Investors’ tranquilized reaction was a reflection of their seeming lack of ability to feel much anger or sadness during the battle. Dell’s shares fell little after the initial bid or the frenzied subsequent offers.

Perhaps shareholders never thought Dell had much of a chance against the much larger HP. A better explanation may be that many investors have simply given up on the stock. Dell’s shares are down about 70 percent over the past decade. The company has acquired a reputation for producing inferior products and offering poor tech support. An accounting scandal cost the company $100 million. Apple’s  increasing inroads into the computer market could cost Dell sales. And rivals such as HP, IBM, and Oracle are far ahead in offering one-stop shopping for clients.

While Dell’s weak recent record could easily continue, such investor apathy can be the sign of a stock bottoming. The shares trade at less than 10 times estimated earnings for this year, and the company’s cash flow yield is around 15 percent, according to Merrill Lynch. The company also has more than $7 billion of net cash on its balance sheet. Perhaps the shares have become so unloved that there’s finally a case for a bit of enthusiasm.

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