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Double-edged sword - M&A is not invariably good news for value investors

05/03/2013

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

One of the potential advantages of following a value investment strategy is that even if the wider stock market fails to recognise the value of a company, you can still be the beneficiary of a competitor, management team, private equity investor or whoever deciding to make a bid. We only say ‘potential advantage’, however, because this turn of events can be something of a double-edged sword.

There are times it can work out very well because someone wants to buy into a company you own on peak profits and a high valuation and, as a seller, you will benefit from a ‘generous’ price. As we touched on recently in circle of life, these deals that worked out far better for the sellers than the buyers happened with house builders a lot in the middle of the last decade but other examples from that period include such high-profile companies as Emap, Reuters and Scottish & Newcastle.

Then again, there are times when you are bought out for a trifle – which brings us to computer manufacturer Dell. We bought into the company at the end of last year in the belief it was very cheap. Apparently we were not alone as, at the start of February, Michael Dell announced his intention to buy back the business he founded in 1984 and in which he now has a 16% stake for $13.65 (£8.83) a share.

Having purchased our own 0.08% stake for $10, we do stand to make a reasonable amount of money very quickly if the deal goes ahead. However, having ourselves valued the business at upwards of $20, it rankled that we would end up making a lot less money for our investors than we felt we should.

With our 0.08% up against Michael Dell’s 16%, we thought we would just have to chalk this one up to experience but it soon emerged we were not the only unhappy shareholders. A variety of the great and the good of the value management world, including Southeastern Asset Management, Pzena investment management and Harris Associates, were lining up to say: “not so fast.”

So now we are going to throw our own hat into the ring and make use of the corporate governance team and all the other resources we are so fortunate to have support us to see if we can achieve a more reasonable bid from Michael Dell.

The potential downside to this course of action is little to none as the current bidders are highly unlikely to walk away and, even if they did, the share price should be supported by the fact someone has previously made an offer at the current level.

The potential upside on the other hand is we receive more than the offer on the table. It is highly improbable it will be anywhere near the $24 being demanded by Southeastern but every penny we can extract from the bidders over and above $13.65 is a better deal for our investors. Watch this space.

 

Author

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials.  In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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