Take-Under of Compellent Technologies (CML)

Usually, when an acquiror launches a bid for a prospective target, the offer is at a premium to the current stock price. This reflects the so-called “control premium”, or the value unlocked by having complete control of the target. Control grants the acquiror complete control over the timing and nature of value-unlocking catalysts, such as the sale of assets, the payment of dividends from a cash hoard, etc. Oftentimes, the target’s board of directors will reject offers unless they are at a premium to the 52 week high (rather than allowing a timely bidder take advantage of a perceived temporary low.

So, for a plethora of reasons, offers are made at a premium to the current price. It is rare and surprising then when a bidder makes an offer below the current price, and even more rare where the target’s management accepts the offer. Last week, Dell Inc. (NASDAQ:DELL) announced the near completion of negotiations with Compellent Technologies Inc. (NYSE:CML) for $27.50, an 18% discount to its prevailing price of $33.65. It should be noted that Compellent was in the middle of a significant run-up when the offer was announced, primarily the result of a strong quarterly release.

Shareholders must still approve the transaction. Should they? Looking more closely at CML, we see that it was trading at a whooping 306x P/E, based on the best earnings in the company’s short history (in other worse, this is not a temporary low for the denominator!). The company has been unprofitable until this year, so the purchase price is based wholly on future growth prospects, a notoriously difficult thing to value and prone to massive error. Additionally, this transaction reflects a P/B of nearly 7x, which is in stark contrast to the Jones Soda Take-Under which occurred below liquidation value! In other words, CML shareholders should be happy with this offer. Some appear to be concerned, as the defenders of justice lawyers are on the case, investigating whether something improper has occurred.

Talk to Frank about Take-Unders

Author Disclosure: No position.

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