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How to Turn the Icahn-Dell Dustup into a Big, Fat Yield

When Carl Icahn knocks on your boardroom door, get ready for trouble. Just ask Michael Dell…

Because Icahn, well known for his history of aggressive management takeovers and shakeups, paid Dell a visit yesterday and bought up a reported (but unverified) 6% of the company’s shares.

It the figure is correct, that makes Icahn Dell’s (DELL) third-largest shareholder, next to Southeastern Asset Management and Michael Dell himself.

Behind Icahn’s sudden involvement is a leveraged buyout proposed by Michael Dell and Silver Lake to take Dell private – to the tune of $24.4 billion, or $13.65 a share.

The planned move might be a “tune” for Michael Dell. But Icahn thinks Dell is giving shareholders the shaft. That’s not just his opinion, either, since 14% of the company’s investors are rallying against the bid. And Southeastern calls it “grossly” undervalued.

That’s hardly an unjustified opinion, especially considering that Dell’s currently trading above $14 a share.

Icahn, of course, has his own designs in joining the dustup, which he outlined in his letter yesterday to Dell’s board of directors.

“We are substantial holders of Dell Inc. shares. Having reviewed the Going Private Transaction, we believe that it is not in the best interests of Dell shareholders and substantially undervalues the company,” the letter begins.

Instead, Icahn proposes that – in the event that Michael Dell’s bid is voted down – Dell immediately declare a special dividend of $9 per share. He suggests that Dell raise the money by taking on new debt and repatriating cash from abroad.

Icahn says it’s a far better deal for shareholders. And if his own numbers pan out, it most certainly is.

Cue Dell’s Tears in 3… 2… 1…

According to his analysis, the special dividend plus the “stub” value of $13.81 – what shares will be worth after the cash distribution – would total $22.81 per share. That’s a 67% premium to Michael Dell’s bid.

And if Dell doesn’t do its damnedest to give shareholders what they deserve, Icahn says he’s ready to respond with “years of litigation.” But not before staging a full-on coup by proposing an election of new board members, after which he intends “to run a slate of directors that, if elected, will implement our proposal.”

Trouble indeed, for Michael Dell. And trouble for you, too, if you think that all this talk of massive special dividends somehow makes Dell a viable long-term dividend investment.

Make no bones about it, Dell is in the same troubled water it was in last week.

With a wildly uncertain future, paltry yield, no dividend growth and poor stock performance, could it be a compelling value play? Maybe.

A viable income investment? Absolutely not.

Having said that – rejoice! Because there’s a way – and a reliable one, at that – to squeeze a sizable yield from Icahn’s boardroom hijinks. Here’s Louis Basenese giving the skinny on how to do just that:

Just because Dell isn’t cut out for a long-term dividend play, doesn’t mean there’s no chance of scoring a profit.

To the contrary, look no further than merger arbitrage – investing in a company after a takeover announcement is made – for a way to not only profit from the proposed buyout, but to do so safely and reliably.

Here’s how it works.

With merger arbitrage, we’re looking for a yield between 6% and 8%. In other words, we’re looking for an entry point at least 6% less than the current per-share buyout price.

Since the current (but firm) low-ball offer on the table from Michael Dell and Silver Lake is for $13.65 per share, that means we would need to purchase Dell at $12.83 or less. And when the deal’s made – profit.

But remember, Michael Dell’s offer will probably fall through, and a more lucrative offer will take its place – either from a third party or with Icahn’s proposal.

Translation? Your yield just got bigger.

If Icahn’s proposal is voted through – and he’s correct that his magic touch would result in a share value of $13.81 – you’re looking at a yield of 7%. If an even higher offer sees the light of day, all the better.

Remember to use a limit order if you decide to take advantage of this opportunity.

That’s it for today, folks. Stay tuned for any further merger arbitrage plays that hit my desk…

Safe investing,

Ryan Anders