Southeastern grapples with Dell

As computer maker tries to go private, asset management firm in the spotlight

Dell Inc. was the typical kind of value stock that Memphis investment executives Mason Hawkins and Staley Cates put their clients’ money in.

But after stumbling against tablet computers and iPhones, the laptop computer maker has proposed a leveraged buyout that could cost clients of the wellknown Memphis duo hundreds of millions of dollars.

Now market analysts figure Southeastern Asset Management Inc., the pair’s 37-year-old Memphis firm, may weigh in and try to lessen the blow.

To do that, Southeastern must convince Michael Dell and his backers to pay a lot more than the $24.4 billion, or $13.65 per share, offered on Tuesday in a buyout proposed for all of Dell stock.

“From the standpoint of the large shareholders like Southeastern, they want to reduce the loss or wipe out any loss they’ve had to incur,” said mutual fund adviser Geoffrey Bobroff, head of Bobroff Consulting Inc. of East Greenwich, R.I.

Dell Inc. hit storms in the 2000s, but still promised an eventual uptick that appealed to the stock pickers at Southeastern.

Beginning in 2005, they bought 130 million shares of the computer company, using cash that included institutions and money from clients of Southeastern’s well-known Longleaf Partners mutual fund, a staple for 401(k) savers in Memphis and across the nation.

Southeastern is Dell’s largest shareholder after Michael Dell himself. A report by Bloomberg News figures Southeastern’s losses will reach $ 800 million on the Dell shares at the $13.65 sale price.

The Memphis firm manages about $30 billion for clients and spreads the money over a wide array of assets so the decline of one stock does not threaten a mutual fund.

Bobroff said Southeastern might have used option strategies over the years to limit losses on Dell shares. The strategy amounts to buying insurance that pays off if the stock declines. It’s not clear how much the strategy might have saved. An official at Southeastern did not respond to calls Monday and Tuesday seeking comment.

Getting a higher price from Dell means Southeastern would have to enlist other large shareholders, including T. Rowe Price Associates and Vanguard Group, to press on Dell himself and his financial backers to raise the buyout price.

Hawkins and Cates, although they built Southeastern as a quiet investor, haven’t shied away from tangling with heads of companies whose shares they control. Just last fall, they allied with investor Carl Icahn to press reforms on management of Oklahoma-based Chesapeake Energy Corp., where Aubrey McClendon stepped down in January as CEO after a tumultuous year.

Intervening with Michael Dell, however, presents a new tack. Hawkins and Cates might appear as simply pushing for a better stock price, rather than patient investors looking to stabilize and rebuild a company, Bobroff said.

“It would put them in the position of being activists,” Bobroff said. “Then the question is can they really change anything.”

New York investment manager Barry Ritholtz, a principal at FusionIQ, said he doubts Dell Inc. has enough innovative products in the pipeline to sustain a turnaround.

Dell was brilliant at marshaling factories and parts suppliers into a worldwide assembly line that delivered low- cost laptops to U.S. customers. But the company had no firm answer for the tablet computer or Apple Inc.’s 2007 debut of the iPhone, a tiny computer that also serves as a telephone.

“The curtain will come down on Dell,” Ritholtz said. “Dell, like Microsoft, missed most of the big tech trends of the last decade, like Twitter, tablets and smartphones. I look at Dell, which was once a major technology company, as a cheap manufacturer of baubles irrelevant to my universe of tech stocks.”

Where does that leave Southeastern? On Tuesday, the Memphis firm gave no public sign of its next step even after Dell revealed details of the $24.4 billion buyout offer. It would involve $500 million pitched in by Michael Dell, who said he plans to stay aboard and steer the company.

Ritholtz was critical of the proposed deal, saying investors might balk at the $ 13.65 offer and join with Southeastern in demanding a higher payment.

“Some of those investors are probably saying, ‘We don’t want to sell for $13 if we think you’re going to turn around and flip the thing for $26 in a few years,’” Ritholtz said.

If analysts at Southeastern figure that kind of flipping scenario might play out, Bobroff said, they might try to remain aboard as investors in Dell and look for a payoff toward decade’s end.