Daily Management Review

Dell Buyout Valued at $24.9 Billion was Underpriced by 22 Percent, Rules U.S. Judge


06/01/2016




Dell Buyout Valued at $24.9 Billion was Underpriced by 22 Percent, Rules U.S. Judge
Michael Dell and Silver Lake Partners may have to pay tens of millions to investors who opposed the deal for the computer maker as they have been ruled by a a Delaware judge to have underpriced their 2013 $24.9 billion buyout of Dell Inc by about 22 percent.
 
For the specialized hedge funds that have increasingly tried to squeeze more money from mergers using a type of lawsuit known as appraisal, the ruling is a victory and it applies to about 5.5 million Dell shares.
 
After filing a suit, the lawsuit allows investors who oppose a deal to ask a judge to determine a fair deal price such as in the bitterly contested Dell buyout.
 
Dell shareholders were urged to vote down the deal and take their case for fair value to court by activist investor Carl Icahn. The bulk was removed for procedural reasons after the initial appraisal was sought for about 40 million shares.
 
The fair value was $17.62 per share, not the $13.75 per share deal price, said the ruling by Vice Chancellor Travis Laster.
 
Investors who sought appraisal will collect about $20.84 per share with interest.
 
The fair deal by the Dell investors was value was placed at $28.61 per share which would have cost Michael Dell and Silver Lake hundreds of millions of dollars. The buyers contended that fair value was $12.68. The intrinsic value of the deal was never determined by the board before negotiating and the Dell buyout took advantage of a dip in the company's stock price, Laster said.
 
"The original merger consideration was dictated by what a financial sponsor could pay and still generate outsized returns," wrote Laster.
 
In specific reference to a management-led buyout, why the deal price was not a fair value indicator was explained in details by the judge. Delaware judges closely watched buyouts of Ancestry.com in 2012 and BMC Software Inc in 2013 and had used deal price in appraisals involved in those dealings.
 
The ruling entails that the buyers would have to pay about $36 million more for the deal. Affiliates of Magnetar Capital hold about 3.9 million appraised shares.
 
For the sole purpose of seeking appraisal, a small number of hedge funds have built a strategy of buying stock at a time when there is less risk a deal would collapse and in particular just before a deal closes.
 
Investors who seek appraisal collect interest of 5 percentage points above the federal discount rate while the case is pending and do not get paid at the deal's closing.
 
The hedges funds are encouraged to bring cases because they can earn a return even when a deal price is found to be fair, complains the U.S. Chamber of Commerce.
 
T Rowe Price, one of the few mutual fund managers to test the appraisal strategy may be one of the biggest losers from the Dell case. Since the fund manager had mistakenly voted in favor of the buyout, T Rowe Price's stock, which comprised the bulk of the shares in the case, was knocked out by Dell.
 
"T Rowe Price runs mutual funds and allocates capital, but they may regret trying to do this themselves. This is just one of the pitfalls with appraisal, and it's not for novices," said Minor Myers, a professor at Brooklyn Law School in New York.
 
(Source:www.reuters.com) 






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