TechniqueCase studyValuationActivism and governanceDeals and M&A
A sum of the parts shows what a take-private bid is paying nothing for
Mason Hawkins, Staley Cates · Southeastern Asset Management's letter to the Dell board (February 2013) · 2013
The idea
Southeastern's 2013 letter opposing the management-backed buyout of Dell is a worked sum-of-the-parts. Net cash of 3.64 dollars a share, the finance arm at 1.72 and acquisitions at cost of 7.58 total 12.94, so the bid valued everything else, the servers, services, software and PC businesses, at under a dollar. Adding those at modest multiples reaches 23.72 a share. The letter then proposes an alternative, a leveraged recapitalisation funding a special dividend, and argues that a go-shop is not enough when the chief executive is on the buying side. It is the method activists and fairness analysts use, shown in full.
Value each part a bidder is acquiring; what the bid leaves at zero is the argument against it.
When it works
Take-private analysis, fairness opinions, conglomerate valuation and any activist defence of a holding.
When it may fail
Acquisitions at cost may be worth less than cost, and multiples on the remaining businesses are the whole argument. A sum of the parts proves a bid is low only if the parts are worth what the letter says.
How to use it
For a bid on a multi-business company, list the parts, value the easy ones first (cash, investments, acquisitions at cost) and compute what the bid implies for the rest. If the implied value is near zero, that is the first slide of the response.
Where it came from
Letter Southeastern Asset Management's letter to the Dell board (February 2013) · Mason Hawkins and Staley Cates
What the source says. Southeastern counts net cash of $3.64, Dell Financial Services at $1.72 and acquisitions at cost of $7.58 per share, so the bid valued everything else at under $1.00; adding the operating businesses it reaches $23.72, and proposes a recapitalisation funding an $11.86 special dividend.
“an opportunistically timed bid to take the Company private at a valuation far below Dell's intrinsic value” · Mason Hawkins
Connected ideas
Puts it to work
A management buyout puts the seller on both sides of the tableIn a management buyout the insider is the buyer, so the board's job is to make the market, not take the offer.
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Activist margin arithmetic: headcount, cost per head and incremental margin, line by lineBuild a margin case from countable inputs, headcount, cost per head and incremental margin on growth, so that every disagreement is about a number.
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Orange and Blue: a two-part intrinsic value that decides whether to buy back or issuePublish the method for intrinsic value, then let it decide: buy back below it, issue above it, and keep the multiple consistent so the method cannot flatter.
Concepts
Put it to work on L3VLUP
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