Blackberry (BBRY)’s search for strategic alternatives

a 6-K

Yesterday BBRY filed a 6-K (it’s a foreign–i.e., Canadian–company, hence it’s a 6-K, not an 8-K) with the SEC, which consists of the press release it issued at the same time.

In it, BBRY (BB for you Toronto Stock Exchange fans) says it’s setting up a committee to explore strategic alternatives, which the firm defines as “possible joint ventures, strategic partnerships or alliances, a sale of the Company or other possible transactions,”

BBRY also says the board member, Prem Watsa, CEO of BBRY’s largest shareholder, investment firm Fairfax Financial, has resigned from the board citing “potential conflicts” that may arise as the committee does its work.

What’s going on?

It seems to me that BBRY effectively hung a “For Sale” sign around its neck in March 2012–and has had no takers.  So the announcement appears to mean–and is being widely taken on Wall Street as meaning–that BBRY is getting ready to go private.  Mr. Watsa’s resignation from the board suggests his firm will want to be part of the private ownership group.

Why go private?  

Why can’t BBRY do what’s necessary while retaining its listing?  It’s all about financing.

1,  For one thing, it’s better to have no price than a low price.

BBRY may need radical surgery to survive.  Contrary to the picture presented in finance textbooks, Wall Streeters aren’t steely eyed rational thinkers.  The sight of blood and body parts on the operating table makes them woozy.  During restructuring, the stock price might decline–sharply, very sharply.  Professional short-sellers, whose job is to kick a fellow while he’s down, would certainly help push the price down.

The low price–let’s say $1 a share vs. about $11 now–has several bad consequences.

–It scares the wits out of potential sources of finance, either the junk bond market or commercial banks, who would take the same factual situation much more calmly if there were no plunging price chart.  This effectively cuts off liquidity, just as the firm needs it the most.

–The price could get low enough that the stock is delisted, another unnecessary black eye.

–Worst of all for shareholders, a stock that’s unattractive to acquirers at $11 may become irresistible at $2.  Shareholders might jump all over a takeover bid at $4–in effect “stealing” the patient right out of the recovery room.

2.  Look at DELL.  Silver Lake has lots of experience in turning around tech companies.  Its price?  …ownership of the company, i.e., the lion’s share of the profits from doing so.  That’s just the way it is.

3.  One of the ugly secrets of private equity is this:  sometimes, when the private equity owners sense the ship is sinking despite their best efforts, they make a large junk bond offering and pay out some or all of the proceeds as a dividend to themselves.  Their risk is lessened by the return of capital; that of the offering company is increased.  This maneuver would be impossible to accomplish with a publicly listed company.

4.  Yes, going private frees management from SEC-mandated financial disclosure and from the need to do extensive investor/press relations.  But I think this is a minor benefit in comparison with either #1, #2 or #3.








the strange struggle for control of Dell Inc. (DELL)

the emphasis is on strange

I’m not a DELL fan and haven’t been for a long time.  I’m relieved to not be in the position of having to decide what to do with my DELL shares, since I don’t own any.

The control struggle, so far:

Michael Dell, the founder and holder of 16% of the equity, thinks he–and his partner, Silver Lake Management–can breathe life back into the husk of a once-powerful company.  Their price for doing so, however, is all of the upside.

They are being opposed by investment manager Southeastern Asset Management, which had accumulated a large position in DELL (apparently at higher cost) and by corporate buccaneer Carl Icahn.  These two appear to believe that DELL is a treasure trove of undervalued assets that would be worth significantly more than today’s share price either under better management or in an orderly sale.  They balk at both the Michael Dell description of the DELL malady and the price of the cure.

I don’t have an opinion.  My hunch is that technological change and Asian competition have undermined the DELL edifice much more than Southeastern thinks.  I’m not persuaded by Southeastern’s published valuation.  But I haven’t done the work that might back up my hunch  with facts.

The strange stuff?   …two things:

1.  ISS

ISS is a proxy voting advisory firm.  It exists, in my view, mostly because the Federal government requires investment managers to cast votes for all the shares that they have in their portfolios for all corporate actions–and to do so in a way that benefits their clients best.

If management companies made the needed voting decisions in-house, they’d have to hire staff.  No matter what they did, they’d still run the risk of second-guessing by Washington.  So, they’ve outsourced the job to third-party firms like ISS, who collect data, analyze and make voting recommendations.  This saves mutual fund and pension managers time and money.  And ISS deflects potential blame from them   …sort of like an insurance policy.

In this case, ISS is recommending that clients vote in favor of the Michael Dell buyout proposal.

The strange thing is that, if the New York Times is to be believed, ISS’s rationale is that, like me, it’s skeptical that the Dell ship can be righted.  The Times quotes ISS as making the oh-so-British analogy that Michael Dell’s bid to buy DELL may be akin to “trying to catch a falling knife.”  In other words, it’s a bad idea and one where he’s likely only to hurt himself.  (For fans of British equity research prose, he may also be viewed as in the process of “grasping a poisoned chalice”, thinking it’s “a nettle.”)

For ISS, $13.65 a share is at or above the point where there’s any reward to holders for accepting the risks of a failed turnaround.

My translation: ISS thinks both buyout groups are crazy.

2.  failed proxy solicitation

DELL’s board of directors has approved the Dell/Silver Lake bid and called for a shareholder vote on it.

Two ground rules agreed to by all parties:

–Mr. Dell’s stock doesn’t get a vote, and

–any shares that don’t cast a ballot will be counted as voting “no.”

No big deal, I thought.  Institutions will vote the way ISS says.  And individuals always enthusiastically back anything that management recommends, no matter how loony or contrary to their interests it may be.

But no!!!!!!

In this case, individuals are resisting the blandishments of proxy solicitation firms (who call you up at dinnertime, plead their case and take your vote, then and there) in a way they never do, and are declining to vote.

Mr. Dell has asked to have the vote tally postponed   …twice.  There’s no reason to do so other than that he doesn’t have enough votes to win.  And now he’s telling the board he’ll toss in another $.10 a share if they change the rules so that non-voting shares aren’t counted as doing anything.

It’s hard to see what individuals gain by not voting.  It may be that they find it too hard to decide and have opted to take whatever fate brings them–although, as I mentioned earlier, generally individuals never have trouble backing management.  My hunch is that most holders have a loss and find it too difficult psychologically to take an action that will cause that loss to be realized.


the DELL story heats up

latest developments

The New York Times reported yesterday that influential investment manager T. Rowe Price has joined the chorus of holders of DELL who are protesting that company’s board-approved proposal to be taken private by CEO Michael Dell and private equity firm Silver Lake at a price of $13.65 per share.

DELL’s largest institutional shareholder, Southeastern Asset Management of Tennessee, who we now know from a 13-D filed with the SEC owns 8.44% of DELL’s common (acquired at a price of just below $16 a share), seems to be leading the opposition to the deal.  


–Southeastern has published on its website an open letter to DELL, in which it outlines its argument that the company is actually worth about $24 a share, almost twice what the board has okayed as an acquisition price.  

–In the letter, Southeastern also gives a thumbnail sketch of a plan, using brokerage house earnings estimates, by which DELL could leverage itself (to the sky), pay shareholders a $12 special dividend and still be able to generate annual free cash flow of over $1 per share.

The NYT Southeastern has hired a proxy firm and a mergers and acquisitions lawyer.  In its letter Southeastern says it intends to pursue the matter through a proxy fight, lawsuits and, if I understand correctly, an appeal to the Delaware Chancery Court.

what I find interesting–and worth monitoring

–Southeastern is really upset, in a way I can’t recall ever seeing in a US-based institution.

It isn’t opposed to having DELL go private per se, only to the combination of preventing existing shareholders, ex Michael Dell, from participating, and what it sees as the low-ball price.

–Proxy fights are tricky things.  Why?  Individual investors support management overwhelmingly, even when it’s loony to do so.  It’s also hard to tell how much stock has been scooped up by arbitrageurs in the high-volume trading of the past month.  These guys aren’t in this for the long haul.  They want a quick profit and an exit.

Experience tells me it will be extremely hard for Southeastern to come up with enough votes to block the deal.  But it sure does seem motivated.

Always an advocate of the ad hominem argument (e.g., “You’re ugly!”), I wonder how the directors make out in this deal.

–Southeastern says in its letter it intends to avail itself of  “any available Delaware statutory appraisal rights.”

Here’s what I think this means:  if a tender offer is successful in acquiring 90%+ of a company’s stock, the buyer can go to court and compel the remaining 10%- to tender their shares.  That 10%- have recourse, though.  They can appeal to the court for a hearing to argue that the price is too low.  If successful, they (and no one else) receive the court-determined higher price.

I’ve only followed this kind of appeal once.  The process took three years.  During that period, the company in question deteriorated markedly.  It turned out in hindsight that the acquirer had paid a crazy-high price.  So the court stated the (now) obvious–that the original price was too much.  So the reluctant 10%- ran up a pile of legal bills and got the original acquisition price, only three years late.

I wonder how things will turn out this time.

nits (or maybe slightly bigger issues) to pick

I understand the Southeastern letter only has the bare bones of its valuation argument.  Still, I view DELL has having much less cash than Southeastern assumes.  Yes, it’s there as $$$ on the balance sheet.  But a lot comes from DELL being able to hang on to the money it gets from customers before it needs to pay suppliers–sort of like a restaurant that gets cash every day but only pays for vegetables, rent and power at the end of the month.  Another big chunk comes from advance payments from corporate customers for IT services.  That’s sort of like magazine subscriptions, where the publisher gets money as much as a year before he puts the last issue in the mail to you.  Yes, things are fine in both cases as long as the business expands.  But the money evaporates if the business begins to contract.  As I read the balance sheet, DELL’s cash, net of these timing differences and   debt, is around zero.

Borrowing a gazillion dollars does mimic what I imagine Silver Lake intends to do as/when it takes DELL private.  Pay that out in a special dividend as Southeastern suggests is an alternative to going private, however, and how is the now highly leveraged company ever going to pay the principal back?

I understand that Southeastern wants to use third-party figures in its public analysis, but I find it humorous that its authorities are:  a management whose performance has lost 2/3 of the stock’s market value in a rising market; and Wall Street securities analysts who, as a group, are notoriously optimistic and deeply beholden to company management.




Michael Dell taking Dell Inc. (DELL) private–why?

the deal

On February 6th, DELL confirmed the rumored buyout of the company by founder Michael Dell and private equity firm Silver Lake.  The board has approved an all-cash deal in which holders of Dell common will receive $13.65 for each share.

The structure of the private Dell isn’t 100% clear.  From press reports, Michael Dell will contribute his 14% holding in the company, worth $3.3 billion at the buyout price, plus $700 million in cash in return for a majority stake in the new entity.

Let’s assume MD’s $4 billion buys a 50% interest.  Given that the overall assets of DELL are being valued at $24.4 billion, this would imply that the private company will have $16.4 billion in debt to go with $8 billion in equity.  That’s a tripling of the financial leverage that publicly traded DELL now maintains–no great surprise for a private equity deal.

DELL is a mess

Profits peaked in 2005, when the company achieved a return on invested capital of an extraordinary 83%.  This year’s results (the fiscal year ends in January) will be around 40% lower than that high water mark, and will likely represent a 15% return on capital.  Strangely, the company has decided to celebrate this adverse turn of fortune by initiating a dividend.

In recent years, DELL has been attempting to transform itself from being an assembler of heavy, clunky (but inexpensive) PCs for mostly corporate users into a purveyor of corporate IT services, using IBM as a template.  Nevertheless, by far its largest expenditure since its profit peak has not been on service company acquisitions or on internal development.  Instead DELL has chosen to retire a quarter of its outstanding shares since 2005, at a cost of (I almost can’t believe the numbers) $22 billion or $23.80 a share.  With the stock was trading at around $8 before rumors of going private surfaced, this continuing decision represented $14 billion in lost value to shareholders.

Since the beginning of 2005, the S&P 500 has risen by 29.6% on a capital changes basis.  Over the same time span, Lenovo is up by 118%.  Hewlett-Packard is down by 12.7%.  Dell has lost 66.8% of its per share market value.  Acer and Asustek have been equally bad performers, although that’s cold comfort.

shock therapy?

That’s what I think this buyout is about.  It’s been clear for years that the traditional PC assembler model is broken.  AAPL’s success clearly demonstrates that.  Samsung has emerged as a very powerful competitor, as have Lenovo, Asustek and Acer.  INTC’s Chromebook initiative and  MSFT’s Surface both show frustration with the lack of competitive relevance of assemblers like DELL and HPQ.  Yet, as far as I can see, DELL hasn’t improved its PC offerings, or its service, much at all.

In my experience, mature companies can resist change in an almost unbelievably stubborn way–the source of the saying that “Turnarounds never happen.”  Maybe managers lack the skills needed to succeed in a new environment, so they simply can’t do a better job.  They may not understand the issues.  Or they may not be risk takers, preferring a mediocre-to-bad present to an uncertain, but possibly better, future.  In any event, they drag their feet.  What can one man do, even the founder of a company, in the face of widespread inertia?

Bring in a whole new management–a firm like Silver Lake that specializes in straightening out mature, underperforming tech companies.  The going private part of the maneuver is at least partly that it’s Silver Lake’s price for taking on the job.

some big DELL holders aren’t happy

Southeastern Asset Management, which owns just under 10% of DELL, is one of them  Reuters reports that there are at least a few others.

Even a cursory glance at a stock chart will tell you why.  Unless the firms in question bought DELL in the last couple of months,  or during the final days of the market meltdown in early 2009, they will be forced to recognize big losses from holding the stock.

They have some justification, since they’ve stuck with DELL through thin and thinner.  This is what value investors do.  They buy mediocre or weakly managed companies and wait for change to happen.  They’ve been right in this case that change would happen, except that it’s coming in a way they didn’t anticipate.

On the other hand, DELL probably needs much more radical surgery than the institutions ever imagined, meaning that it would best be done away from the requirements of public disclosure, from media attention and from the reach of short-sellers.  That way customer confidence is easier to maintain.






HP, Dell, Big Lots–what their results are saying about the US economy

a qualifier

Actually, this post is more about how I interpret their results.

There’s always ambiguity in any assessment of how companies are doing, including management’s own statements.  There may be issues that managements are unaware of.  There will likely also be others that, especially in the case of a weaker firm, the top brass will tap dance around when speaking to investors.

It’s possible they may be in denial.  But no one is going to turn his earnings conference call into an advertisement for competitors by revealing that, say, “Lenovo has better products than we do, so they’re taking market share from us wherever we compete.”  That just speeds the customer exodus.

We are , however, in a slow-growth world today, where there’s simply not enough business for all market entrants.  During a boom, the top firms don’t have enough capacity to meet customers’ demands.  So buyers who need a product now have no choice but to purchase from second- or third-tier competitors.   In the current environment, in contrast, the number-ones have capacity.  And customers have more time to study competitive offerings before they choose.

the PC business:  Dell and HP

Both are icons of the PC business in the US.  But neither has kept up with the market. True, Windows Vista certainly didn’t help to enhance the reputation of either.  And both have lost market share to Apple.  Also, the market for Windows machines is being negatively affected at the moment by consumers’ reluctance to buy Windows 7 machines because Windows 8 is just around the corner. But as an ex-Dell user (now writing either on a Mac or an Asus machine), I know Dells weigh a ton, run hot and don’t last very long.  Customer service is awful.  HP isn’t much better.

Asian giants Lenovo, Acer and Asustek don’t yet have the support infrastructure in the US that they do  elsewhere.  But the performance of the US incumbents seems to be an open invitation to these firms to take a lot of market share from HP and Dell here–as they are already doing abroad.

Anyway, what I think we’re seeing in the HP and Dell results is the loss of share that weaker players experience in times like these–not evidence of overall economic malaise.

Big Lots

…another company with weak results.  I don’t think Big Lots’ poor performance is indicative of macroeconomic weakness, either.  On the contrary.  I see it as more evidence that consumers are trading up, because their personal economic fortunes are improving.

Trading up and down are complex phenomena.  In bad times, the Saks customer may shop at Target, the target customer at Wal-Mart, the Wal-Mart customer at the dollar stores.  The dollar store customer may just not consume or buy at venues that are below Wall Street’s radar screen.

(Of course, trading down among retailers isn’t the only effect of recession.  Overall, consumers buy less.  They also buy more plain-vanilla, less expensive items that they can use for a variety of purposes.)

In good times, the opposite occurs.

But in both situations, only the merchants at the bottom of the chain and at the top see unambiguous results.

I think two forces are at work in Big Lots’ sales:  rainy day customers are trading up; and, unlike the more progressive of the dollar stores, BIG hasn’t expanded its offerings enough to hang on to more affluent buyers.

my bottom line

I see the results for HP, Dell and Big Lots as simply what happens to weaker companies in a US growing at 2% a year.  The poor numbers aren’t reasons to run out and buy the S&P 500.  But, equally, they’re not a reason to sell, either.