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VOL. 128 | NO. 29 | Tuesday, February 12, 2013

Memphis Investment Firm at Odds With Dell

By Andy Meek

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Following Memphis-based Southeastern Asset Management’s public opposition to Dell Inc.’s proposed $24.4 billion buyout, the Texas-based tech company is trying to reassure shareholders that the deal will be beneficial.

In a regulatory filing Monday, Feb. 11, Dell officials said it considered a number of strategic options before agreeing to the deal and points out that the deal allows time for alternate bids so shareholders will be able to see if there are superior options available.

Southeastern – Dell’s largest outside shareholder with 8.5 percent, or more than 147 million shares – sent a letter Friday, Feb. 8, to Dell’s board arguing that the proposed sale to founder Michael Dell and private equity firm Silver Lake Partners is not in the best interest of shareholders.

“We believe that the proposed transaction, under which Dell’s public shareholders would receive only $13.65 per share, clearly represents an opportunistically timed bid to take the company private at a valuation far below Dell’s intrinsic value, and deprives public shareholders of the ability to participate in the company’s substantial future value creation,” wrote Southeastern chairman and CEO Mason Hawkins and president and chief investment officer Staley Cates.

Southeastern believes Dell is worth up to $24 a share, significantly higher than the proposed $13.65 per share.

Forbes magazine estimated the company could book more than $1 billion in losses if the Dell buyout occurs in the proposed price range. Southeastern says the loss would be hundreds of millions of dollars.

Like other legacy technology companies, parts of Dell’s business have seen an erosion in recent years as the era of the PC begins to make way for the era of tablets and smart phones as primary technology devices.

Another challenge is the trend toward cloud computing, which hampers the company’s effort to sell servers to big companies. Consequently, Dell stock has slumped in recent years, not reaching $14 since May 2012 and even falling below $10 late last year.

Michael Dell, who founded the business in his University of Texas dorm room in 1984, is contributing about $4.5 billion in stock and cash to help pay for the deal. The rest of the money would be supplied by the investment firm Silver Lake, loans from Microsoft Corp. and a litany of banks.

The loans will burden Dell with debts that could leave the company with less money to invest in innovation and acquisitions.

The proposed $24.4 billion purchase price is 80 percent below Dell’s top market value of more than $150 billion at the peak of the dot-com boom 13 years ago. The $13.65 per share offer is 25 percent above where Dell’s stock stood last month, before word of the buyout negotiations leaked out in the media.

Meanwhile, locally, it’s hard to find anybody willing to bet against highly regarded Southeastern. The fund manager is wading into “a fairly easy fight,” says one Memphis investment professional, pointing out that the current offer is “cheap considering the on-hand cash and current earnings.”

Without speaking to the Dell transaction specifically, a variety of investment professionals are quick to express respect for Southeastern and its top principals.

Duncan Williams, president of Duncan-Williams Inc., said Hawkins and Cates are “two of the smartest guys I have ever met, and what they have taught me about business and about being leaders in our community has been invaluable.”

Marty Kelman, a principal with Kelman-Lazarov Inc., said he knows Hawkins and his wife personally through an association on the advisory board of Facing History and Ourselves in Memphis.

Kelman-Lazarov Inc. “has had the utmost respect for (Southeastern) for many years,” Kelman said. “They are true value investors with a concentrated portfolio, who purchase stocks based on the intrinsic value of the business and are extremely patient investors.

“They also invest much of their own money into their funds alongside the shareholders of their funds,” he said.

David Waddell, president of Waddell & Associates, offered a similar thought.

“They have been successful and disciplined value investors for a long time,” Waddell said. “Their concentrated nature invites volatility, but their long term track record has handsomely rewarded loyal and patient investors.”

Hawkins has even been regarded at times in the financial press as the Warren Buffett of mutual fund investing.

In 2012, each of the three funds in Southeastern Asset Management’s Longleaf family of mutual funds exceeded their annual goal of 10 percent plus inflation, in addition to outperforming their relevant benchmark indices.

The result was double-digit returns for each of the Longleaf funds over the past year, a pattern of growth the fund managers are confident they can replicate over the next five years.

Hawkins and Cates talk to the financial press from time to time but generally keep a low profile as they go about delivering ample returns for their shareholders by pursuing a strategy that calls for conservative appraisals of often overlooked companies and buying them at “points of pessimism.”

“We then will wait patiently as values grow, and the market ultimately recognizes intrinsic worth,” Cates and Hawkins wrote in Southeastern’s latest letter to shareholders in January.

Both are members of the local Society of Entrepreneurs; and Cates is part of the local ownership of the Memphis Grizzlies.

The Associated Press contributed to this report.

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