from Breakingviews:
Are Dell’s shareholders on Xanax?
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.
Deals wrap: Whopper deal sealed
Burger King agreed to be bought by investment firm 3G Capital for $3.26 billion. The deal represents a 46 percent premium to Burger King’s share price before news of the deal talks emerged on Wednesday. *View article *View WSJ article on how tasty a Burger King deal is
Hewlett-Packard raised its offer by $3 to $33 per share for 3Par. Shortly after, Dell announced it is bowing out of the bidding war for the data storage company. *View article
China is stepping up attempts to hamper BHP Billiton’s $39 billion hostile offer for Potash Corp, amid worries about future supplies of fertilizer it needs to rapidly boost food production. There is a report that China’s state-run Sinochem has hired HSBC to advise it on options and another which says China is considering launching an anti-monopoly investigation into the deal. *View article *View factbox on Potash supply and demand
Worldwide M&A volume last month was the largest in over a year. Get a snapshot of the deal activity in this PDF.
Deals wrap: Is 3PAR a good deal?
Dell is expected to soon give up its pursuit of 3PAR, either ceding to HP’s last offer of $30 per share or giving up at a few dollars higher, according to a Reuters survey of eight technology investors and analysts. * View article *Columnist Robert Cyran asks: Is 3PAR an overpriced bauble for HP? * An MSN article makes the case that both Dell and HP are certifiable.
AIG faces the prospect of looking for another buyer for its Taiwan unit after regulators threw out its proposed $2.2 billion sale of Nan Shan Life to China Strategic. There have been suspicions in Taiwan about the connections of China Strategic with political foe China, and concern it did not have the experience to run an insurance business. * View article
Some high-profile IPO’s are under water and this is not sitting well. “Investors are sick to the back teeth of being treated like idiots,” Dan Nickols, at Old Mutual Asset Managers, tells the Financial Times. *View FT article
from Breakingviews:
3PAR battle is case of undisciplined cash vs. cash
Consumers may still be deleveraging, but at big corporations it's liquidity galore. How else to explain the curious case of the bidding war over 3PAR, a data storage company coveted by Dell and Hewlett-Packard? There's no sound mathematical rationale for the 3PAR frenzy, which has now reached $2 billion with HP's third counter-offer to Dell.
Only a highly creative financier with a spreadsheet and a bong could justify the valuation on HP's latest bid -- the sixth for the company in three weeks. HP is offering $30 a share -- more than three times 3PAR's $9.65 undisturbed price as of Aug. 13. Plus, HP will pay a $72 million termination fee if it clinches the deal.
Let's put that into Excel and smoke it. Assume HP -- or Dell for that matter -- really can pump up the sales volume of 3PAR by stuffing it through its distribution pipeline. Consensus estimates compiled by Thomson Reuters show the company is already expected to improve sales from $195 million last year to $460 million by 2014.
Say 3PAR's new owner can supercharge that growth, doubling sales to $920 million instead, while maintaining projected operating profit margins of 11 percent. That gives earnings before interest and tax of just over $100 million. Taxed at 30 percent and discounted, that suggests a return on HP's all-in investment of just around 3 percent.
That's way below 3PAR's cost of capital. Of course, HP might argue it's not a bad use of a portion of the cash sitting on its balance sheet. It's certainly a better return than five-year Treasury bills are offering. And maybe the inclusion of 3PAR's kit to its offering will help it sell all sorts of other goods and services.
The trouble is, shareholders of CEO-less HP and direction-seeking Dell might see things differently and have better ways to deploy the cash they effectively own. HP's owners have lopped more than $5 billion off the company's market value this week. That says plenty about how they view HP's creative use of their capital.
Deals wrap: 3PAR bidding war hits $2 billion
What’s another $200 million between rival bidders? Less than three hours after Dell matched HP’s $1.8 billion bid for data storage specialist 3PAR, HP upped the ante to an even $2 billion. The HP offer shakes out to $30 per share. 3PAR shares were up another 20 percent to $31.29 in early trading, according to Reuters. *View article*
FT blogger Gwen Robinson wondered how 3PAR became the target of such an intense bidding war and suggested it may be “simply a throwback to those crazed acquisitive days of the dotcom boom.” *View article*
In another software play, HP is rumored to be a potential bidder for security software maker ArcSight Inc. According to the Wall Street Journal, bidders, including Oracle and HP, could pay up to $1.5 billion for the company. Other ArcSight competitors could include EMC, IBM and CA Inc. *View article*
This month’s $200 billion in takeover announcements is unlikely to assuage fears of a double-dip recession, analysts told Reuters. “For now, the dominant factor on the market remains the U.S. and Chinese slowdown in growth,” Alain Bokobza, head of global asset allocation at Societe Generale CIB in Paris, told Reuters. *View analysis*
Deals wrap: Betting on 3PAR
Trumping HP’s bid by 30 cents a share, Dell offered, and 3PAR accepted, $1.6 billion for the data storage company. *View article *View analysis on valuations taking a back seat to egos
Fast money is building in Potash Corp after BHP Billiton’s hostile bid, but the sheer size of the potential deal could limit the sway arbitrageurs and hedge funds have on the outcome, writes Michael Erman. *View article *Full coverage *View WSJ’s blog on how to say “Potash”
Take a look at what could be Phil Falcone’s riskiest trade ever in a special report on the hedge fund manager’s wireless broadband technology bet. *View article
The private equity sector is responding to the new world order: less capital, less profit and more accountability. *View Bloomberg article
Deals wrap: Lowering expectations
BHP Billiton tried to dampen expectations it would substantially raise its hostile $39 billion bid for Potash Corp as bumper results showed it has plenty of firepower. *View article *View reaction from analysts and investors *View Potash Corp deal scenarios
Dubai World believes it can raise as much as $19.4 billion from selling key assets over eight years, if creditors back its restructuring, a document obtained by Reuters showed. *View article *View reaction from analysts and investors
Dell and Hewlett-Packard are expected to raise their bids for 3PAR, but technology investors and analysts warn of valuations taking a back seat to egos. *View article
Facebook may not be trading on the Nasdaq yet, but based on secondary market transactions the company is worth $33.7 billion. *View FT article *The case for a $50 billion Facebook
The M&A market is making headlines with blockbuster buys, but the WSJ takes a look at what the IPO market says about the state of deals. *View WSJ article
DealZone Daily
American International Group has agreed to sell it’s Taiwan life insurance unit for $2.15 billion, a key step in its effort to raise cash after a U.S. government bailout last year saved the company from collapse, Reuters reports.
CIT Group Inc is seeing little interest from bondholders in a debt exchange offer aimed at repairing its fragile balance sheet, making bankruptcy increasingly likely, sources familiar with the matter told Reuters.
The following other corporate finance-related stories were reported by media on Tuesday:
PC maker Dell Inc is eyeing more acquisitions as part of a turnaround plan and is developing merger expertise, Chief Executive Michael Dell told Bloomberg in an interview.
Bank of America Corp has agreed to hand over to investigators documents describing the legal advice it received related to its purchase of Merrill Lynch, the Wall Street Journal reported, citing people familiar with the situation.
Japan Airlines Corp plans to seek a 250 billion yen ($2.8 billion) debt waiver as part of a new turnaround plan, Kyodo news agency reported on Tuesday.
Brocade: Deal or no Deal?
In an October 11 research note titled “Castles in the Air, Downgrading to Perform,” Oppenheimer & Co analyst Ittai Kidron throws cold water on expectations that Brocade will be bought anytime soon.
The speculation began last week, after The Wall Street Journal reported that Brocade was “quietly” shopping itself, and that Oracle and Hewlett-Packard could be potential buyers.
Later, Reuters reported more details: Brocade had in fact been trying to sell itself for several weeks, and HP had kicked the tires — going as far as to begin due diligence — but stopped short of making an offer for the company because they were only interested in certain assets. Then, Oracle CEO Larry Ellison publicly said his company wasn’t about to buy Brocade. Apart from HP and Brocade, analysts have speculated that IBM and Juniper Networks could also be interested.
Oppenheimer’s Kidron explains why Brocade might have trouble finding a buyer:
Brocade’s shares have risen sharply following WSJ reports the company has put itself up for sale. We, however, don’t anticipate a near-term acquisition. We view Brocade’s data center switching as the prime jewel, and it’s unlikely prospective buyers would pay a hefty premium for it solely.
Kidron then lists each potential acquirer and tells you why those companies won’t pick up Brocade. His comments are in quotes:
- HP: “Risks losing substantial revenue given Brocade’s OEM exposure and material overlap with ProCurve. Only needs a data center switch.” In other words, HP might lose the revenue that comes from Brocade’s partnerships with companies that sell its products. Also, HP and Brocade already make some similar gear.
- IBM: “Return to hardware business unlikely.” IBM has transformed itself from a hardware seller to a global services giant and we heard last week that IBM had decided not to look at Brocade’s books, although that could change.
- Oracle: “Publicly denied interest.” Anyway, Oracle is waiting to get regulatory approval from the European Commission to proceed with its acquisition of Sun Microsystems.
- Juniper: “Overlap with Foundry and too big to swallow.” Juniper is the No. 2 maker of network gear after Cisco and buying Brocade would add scale to its business, but would potentially bring integration challenges given Juniper’s size.
- Dell: “A wild card but busy with Perot acquisition ($3.9B), limiting bandwidth.” Dell might agree with that (see below).
Xerox’s deal no carbon copy of Dell’s
After Dell went to its $10 billion treasure chest to buy up Perot Systems for $3.9 billion, you might have expected investors to be a little more excited about Xerox’s bid for ACS. After all, business services helps Xerox get away from nuts and bolts copiers, much the way Perot was seen helping Dell move away from building computer boxes. And ACS is seen giving Xerox more chips to play against HP, which bought Electronic Data Systems a little over a year ago.
The Xerox bid, unveiled at $6.6 billion, includes 4.935 Xerox shares and $18.60 in cash for each share of ACS. That totaled $63.11 per share based on Friday’s closing prices, but with Xerox shares having lost more than 15 percent in the opening minutes today, the value is now down to a little over $55 per share. Has the office copy machine behemoth misjudged the market? Dell’s stock lost only about 6 percent following the Perot announcement.
Perhaps the issue was more one of timing than anything else. Monday is the Yom Kippur Jewish day of atonement. Speaking with analysts, Xerox CEO Ursula Burns apologized “for our need to do this announcement on Yom Kippur” “It certainly was not our intention.” they wanted to do it before it leaked, she said. The company may have a lot more than bad timing to atone for if investors don’t get behind the deal.
