Dell Value Dispute Spotlights Rise in Appraisal Arbitrage
By Miles Weiss - Oct 3, 2013 12:00 AM ET
Carl Icahn’s plan to seek a higher price for his stake in
Dell Inc. (DELL) put the spotlight on a section of
Delaware law that is being used by a growing group of money managers
to squeeze more cash from corporate buyouts.
Icahn, 77, has vowed to petition the Delaware Chancery Court for an
independent valuation of his 8.9 percent stake in Dell, the computer maker
that won shareholder approval last month for a $24.9 billion buyout led by
Michael Dell. Should he proceed, Dell would have to pay him whatever
the court decides his stake, valued at $2.2 billion under the buyout
terms, is worth. Icahn would get accrued interest of almost 6 percent on
the award, regardless of whether it is more or less than he would have
received through the original deal.
Investor Carl Icahn has
vowed to petition the Delaware Chancery Court for an independent
valuation of his 8.9 percent stake in Dell, the computer maker that
won shareholder approval last month for a $24.9 billion buyout led
by founder Michael Dell. Photographer: Scott Eells/
[To view the video,
Sept. 9 (Bloomberg) --
Billionaire Carl Icahn talks about his decision to give up his fight
to control Dell Inc. Icahn, speaking with Trish Regan on Bloomberg
Television's "Street Smart," also discusses the outlook for Apple
Inc., Netflix Inc. and J.C. Penney Co. (Source: Bloomberg)
With returns from traditional
merger arbitrage waning, the battle at Dell is drawing attention to
appraisals as a way to systematically profit from buyouts. Money managers
such as Nicholas Maounis and Andrew Barroway, boosted by a court ruling
Icahn attained years ago, have developed a strategy known as appraisal
arbitrage in which they buy stock in takeover targets after a deal is
announced and then seek a higher valuation from the chancery court.
“Dell has kind of awoken a sleeping giant,” said Matthew Giffuni, the
manager of Quadre Investments LP, a New York-based firm using the Delaware
court to contest the price paid in July for NetSpend Holdings Inc. “Now
there are new firms who are crawling into the space.”
law, stockholders of companies incorporated in the state are entitled
to a judicial determination of fair value in a takeover. More than half of
U.S. publicly traded companies are incorporated in Delaware, the smallest
state by area after
For years, the petitions were mostly filed by disgruntled investors as the
only alternative to accepting bids they deemed too low. A court ruling on
an appraisal play made by Icahn in 2005 opened the door for money managers
to pursue appraisals more systematically, by analyzing stocks to find
takeovers that appear to pay less than intrinsic value, then buying shares
to gain appraisal rights. The strategy is a twist on traditional merger
arbitrage, in which investors buy shares in a takeover target whose stock
trades at a discount to the buyout offer because of uncertainty over
whether the deal will be completed.
Icahn, SAC Capital Advisors LP and Millennium Management LLC had
challenged the price in Shire Pharmaceuticals Group Plc’s acquisition of
biotechnology company Transkaryotic Therapies Inc. The investors sought
appraisal on 11 million shares, most bought after the record date for
determining eligibility to vote on the deal.
The court said the petitioners were entitled to fair value on all shares,
upending the notion that stock purchased after the record date couldn’t be
included in a claim. The case was eventually settled for $37 a share, the
same price paid in the merger, plus interest.
The ruling allowed arbitragers to buy stock just before shareholders voted
on a transaction, minimizing the danger of a deal falling apart, and
giving investors more time to study financial performance as well as
valuation methods and fairness opinions in takeover documents, which often
are published after the record date is set.
“People are taking advantage of the flexibility on Transkaryotic,” said
Daniel Wolf, a partner in the mergers practice of Chicago-based law firm
Kirkland & Ellis LLP. “You can just sit there and wait and watch and just
decide if the business environment is improved.”
One example is Barroway’s Merion Investment Management LP, which disclosed
a 5.4 percent stake in Houston-based BMC Software Inc. on July 22, two
days before Bain Capital LLC and Golden Gate Capital won approval for
their $6.7 billion acquisition of the company. Merion sought appraisal
last month, forgoing the $46.25 a share that the private-equity firms had
agreed to pay.
Barroway, co-founder of one of the nation’s largest securities
class-action firms, is seeking to raise $1 billion for a group of funds
specializing in appraisal arbitrage. His Merion will target management-led
buyouts, the type of acquisitions in which top executives, often including
the founder, seek to take a company private.
“The fund believes that ‘insider acquirers’ often have a greater incentive
to offer and pay minority shareholders substantially less than fair
value,” Merion says in a marketing document. It will target a return rate
of 20 percent by enforcing appraisal rights through the judicial process.
Barroway, the managing partner at Radnor, Pennsylvania-based Merion,
declined to comment on the strategy.
Maounis, the hedge-fund manager whose Amaranth Advisors LLC collapsed in
2006 after losing $6.6 billion on natural-gas trades, petitioned this year
for appraisals of shares that his new firm, Verition Group LLC, held in
three takeovers, according to the Delaware Register in Chancery.
Verition sought appraisal after investment bank Duff & Phelps Corp. was
bought April 23 by Carlyle Group LP, Swiss bank Pictet & Cie and others.
The firm also filed petitions after the Dec. 31 purchase of Ancestry.com
Inc. by Permira Holdings Ltd. and the July 2 takeover of NetSpend by Total
System Services Inc.
Maounis, whose firm is based in Greenwich,
Connecticut, didn’t respond to requests for comment.
the 18 deals spurring petitions in Delaware through September of this
year, at least 12 drew filings by one or more arbitragers. Merlin Partners
and its affiliates targeted eight transactions, according to the Chancery
Merlin is run by Beachwood, Ohio-based Ancora Advisors LLC, a
money-management firm founded by Richard Barone. Barone, an activist
investor who started his first money-management firm in 1973, said in an
interview that Ancora has done the bulk of its appraisal arbitrage for
about a year, though it had some experience with the strategy previously.
“We look at these deals and try to judge how fair the deal is,” said
Barone, a 71-year-old native of
Cleveland who is no longer involved in Ancora’s day-to-day operations.
“Where we believe the acquiring company is not paying enough, we will go
for appraisal rights.”
Appraisal judgments are paid only to those who file the petition, and can
be more or less than what they would have gotten in the original deal. To
qualify, an investor needs to file an appraisal demand with the target
before the shareholder vote, then oppose the deal or refrain from casting
a ballot. The investor must petition the court within 120 days after the
deal becomes final.
Legal fees can reach millions of dollars, and it typically takes one to
three years for a judgment, though a petition filed in 1983 over
Ronald Perelman’s bid for Technicolor Inc. required 22 years to
Most appraisal claims are settled before the court rules. Quick accords
eliminate the expense of pressing a case, said attorney Jeremy Anderson at
Fish & Richardson PC.
Awards accrue interest at the rate the U.S. Federal Reserve
charges banks to borrow from its discount window, currently 0.75
percent, plus five percentage points, retroactively to the deal’s
Eight of the 45 appraisal actions that went through trial in the past 20
years resulted in an appraisal of fair value that was less than the merger
price, according to Fish & Richardson. In a 2004 ruling on Sunbeam Corp.’s
purchase of Coleman Co. for $5.83 a share, the court said the fair value
“This is value investing in its purest and most professionalized form,”
said Gary Lutin, a former investment banker who runs the Shareholder
Forum, a New York-based group that created the
Dell Valuation Trust to foster the creation of securities backed by
appraisal rights. “Except you are depending on a very sophisticated judge
rather than Mr. Market.”
a 2007 case the court went the other way, ruling in response to a petition
by Highfields Capital Ltd. that Mony Group Inc. was worth $24.97 a share
when acquired by AXA Financial Inc., after $31 was paid in the takeover.
Dell’s founder and Silver Lake Management LLC won the vote on their buyout
Round Rock, Texas-based company on Sept. 12, after months of
opposition, including a competing bid from New York-based Icahn Capital
LP. The buyout group ultimately agreed to pay $13.75 a share plus a 13
Icahn built his stake to 156.5 million shares after the transaction was
announced in February as he fought for control, then asked fellow
investors in July to join him in preparing to seek appraisal rights.
Conceding defeat as the buyout gained momentum, on Sept. 9 he reiterated
his appraisal plan.
Most professional investors view Dell’s intrinsic value in the $15 to $18
range, according to Lutin.
the court were to take two years to rule and award Icahn $18 a share, the
company would owe him $3.17 billion in principal and interest, about $1
billion more than he’d get via the buyout. Outcome aside, it would be one
of the court’s biggest petitions ever, said Lawrence Hamermesh, the Rudy
R. Vale Professor of Corporate and Business Law at the Widener Institute
of Delaware Corporate Law in Wilmington.
Dell is a bad bet for appraisal arbitrage, according to Quadre’s Giffuni.
With others preparing to join Icahn in filing, Dell is unlikely to settle
claims because of the prohibitive cost, he said.
Holders “should be happy with what they are getting,” said Giffuni, a
former merger and acquisitions attorney who formed Quadre in 2009.
Icahn declined to comment on a possible claim. Like any petitioner, he’d
have 60 days after the deal is done to change his mind and accept the
terms, said Charles Nathan, the former co-head of the mergers practice at
law firm Latham & Watkins LLP.
“There is nothing to say that Carl couldn’t turn around and settle for the
deal price when no one is paying attention,” said Nathan, a partner at RLM
Finsbury, a strategic-communications firm headquartered in
New York and
contact the reporter on this story: Miles Weiss in Washington at
contact the editor responsible for this story: Christian Baumgaertel at
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