Why Dell Trades at a Merger Arbitrage Discount

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Dell Inc. (NASDAQ: DELL) is in the midst of what would be one of the largest go-private transactions ever. The PC giant and IT services provider is releasing its quarterly earnings early this week, and it is expected that the PC business has continued to suffer from a change in buying habits toward the tablet and smartphone market away from PCs. What is so interesting now is that the price of the stock has remained under the $13.65 buyout price for almost a month.

Despite the Carl Icahn efforts to force a higher price, Dell’s buyout now looks capped at $13.65 rather than floored at $13.65. You have to assume that the earnings results are going to be very weak on Thursday. Still, Michael Dell will face a serious fight on his hands if he were to lower his $13.65 share price buyout offer. His board has been in support of his offer from the start, but pulling out would almost certainly force his board of directors to stage a coup.   That being said, investors just do not expect that a higher buyout is coming here.

Carl Icahn looks like he wet the bed here thinking he could just muscle his way into Dell to force a higher buyout or to force a recapitalization that would leave a large portion of the company public. Remember when we warned you about the activist investor bubble? Now it looks like holders of the Icahn Enterprises, L.P. (NASDAQ: IEP) units under Carl Icahn could lose some of those big profits if Icahn remains unable to shake Michael Dell into working a better deal.

Microsoft Corporation (NASDAQ: MSFT) is still tentatively involved in a preferred share of sorts, but The Blackstone Group L.P. (NYSE: BX) backed away when it witnessed the decline of the trends in the PC business.

Dell shares are trading at $13.47, some 1.33% under the $13.65 per share buyout price. That leaves very little room for the so-called merger arbitrage investors who take the risk that a deal cannot close.

Dell shares are up 33% in 2013. Rival shares in Hewlett-Packard Co. (NYSE: HPQ) are up by 48% so far in 2013. H-P is in a turnaround and is too large to be acquired, yet Dell’s turnaround and buyout only have the stock up by about two-thirds as much as that of H-P.

The IQ Merger Arbitrage ETF (NYSE: MNA) is betting on the Dell buyout and has about 7% of its assets in the fund. Its investors are hoping that all remains well with the Dell buyout after earnings. With a discount of only 1.3% or so, Wall Street’s vote is that Michael Dell is going to close the deal originally proposed and not for a single cent higher.