Dell investors may want to recall the lesson of Solon

Posted: May 21, 2013 in Corporations
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Profits at Dell are down 79 per cent. They have fallen for six quarters on the trot. The share price has fallen by around 75 per cent since the peak in 2000. Then again, there are no real shocks here. The wider PC market is under the cosh. According to Data Corp, PC sales fell 13.9 per cent in Q1. But there is an interesting lesson here.

Solon (not to be confused with Solomon) was considered to the wisest man in Ancient Greece. He once visited King Croesus of the kingdom of Lydia, which was in what we now call Turkey. The King was fabulously wealthy, and was keen to impress his famous guest. So after he showed Solon his wealth, he asked his visitor, who was the happiest man “you have ever met”. Actually he is supposed to have said: “Stranger of Athens, we have heard much of thy wisdom and of thy travels through many lands, from love of knowledge and a wish to see the world. I am curious therefore to inquire of thee, whom, of all the men that thou hast seen, thou deemest the most happy?”

Solon paused, and responded by referring to an obscure Greek, who had died heroically in battle, earning much honour, and who had previously seen his family grow to adulthood. Alrighty, responded a slightly disappointed King of Lydia, who is the second happiest man? Again, Solon referred to someone obscure.

‘But what about me?’ asked Croesus. ‘Am I not happy?’ Solon replied: “Thou asked a question concerning the condition of man, of one who knows that the power above us is full of jealousy, and fond of troubling our lot. A long life gives one to witness much, and experience much oneself, that one would not choose. Seventy years I regard as the limit of the life of man. In these seventy years are contained, without reckoning intercalary months, twenty-five thousand and two hundred days. Add an intercalary month to every other year, that the seasons may come round at the right time, and there will be, besides the seventy years, thirty-five such months, making an addition of one thousand and fifty days. The whole number of the days contained in the seventy years will thus be twenty-six thousand two hundred and fifty, whereof not one but will produce events unlike the rest. Hence man is wholly accident. For thyself, oh! Croesus, I see that thou art wonderfully rich, and art the lord of many nations; but with respect to that whereon thou questionest me, I have no answer to give, until I hear that thou hast closed thy life happily.”

In other words, you can’t answer that question until life is over. King Croesus later lost his kingdom to King Cyrus of Persia, and finished his days a sorry shadow of his former self, as a reminder to the conquering king of the dangers of hubris. Consider a shareholder in Dell who bought shares in the company on launch and had seen the value of his/her shares rise around 500-fold. They must surely have said they were happy.

Just supposing our shareholder did nothing with the shares, and just enjoyed the dividends. For every dollar invested on launch in 1988, the return in dividends would have been $2.40. So that’s profit, but nothing special. This is something we forget about companies. When a business is valued, that value should be a function of future dividends discounted to give a net current value.

Now Michael Dell wants to take the company private. If he gets his way, he will pay $13.65 a share. That would actually give the shareholder, who invested on flotation a tiny profit, but it would be a big loss for anyone who bought in 2000, however.

Dell shareholder Carl Icahn is against the idea.

What we can say is this. Shareholders who held shares between 1988 and 2000 were too quick to celebrate, unless – that is – they sold out at peak share price. The PC is not dying but it is fading, and who knows whether Dell has a future either as a PC company or something else.

It is by no means certain that if the company does soldier on, and resists Mr Dell’s attempt to take it private, but finally goes the way of Kodak for example, shareholders – other than those who bought stock in the very early days – will have seen cumulative dividends to justify the share price they paid. That’s the lesson of Solon: don’t make a judgement on success too soon.

© Investment & Business News 2013

  1. Patrick Littlehales says:

    Try to buy a PC via the Dell web site and you will see a company in a state of neglect. The site is clunky, to say the least, with blind alleys and red herrings galore. You can end up finding the PC you want one day and then never find that page again. And it looks old fashioned too as do the products in the PC ranges. See if you can find anything innovative or attractive in the line -up, apart from the prices which are remarkable. The tin boxes there would have looked about the same 20 years ago.
    Assuming the site reflects management interest in the business it would seem that the eye is well off the ball. And why not? If you were about to buy the company why would you do your best to get the share price heading upwards again?

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