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THE
WALL STREET JOURNAL.
Markets
Judge Finds Michael Dell, Silver Lake Underpaid for Dell in 2013
Long-running lawsuit argued shareholders were shortchanged
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A judge ruled that Dell founder Michael Dell and Silver Lake
underpaid when they took the company private in 2013. PHOTO:
GLEB GARANICH/ZUMA PRESS |
By
Liz Hoffman
Updated June 1, 2016 10:01
a.m. ET
Michael Dell’s 2013 buyout of his computer company
shortchanged shareholders by more than $6 billion, a Delaware judge
ruled, vindicating critics of the controversial deal who argued it
favored Mr. Dell and his partners.
Spurred on by billionaire activist Carl Icahn, some
shareholders had accused Mr. Dell of trying to snatch up Dell Inc. on
the cheap just as it was poised for a rebound.
What ensued
was one of the most contentious takeover battles of this decade, one
that embroiled some of the biggest names in business and investing:
Mr. Dell, a dorm-room founder turned technology billionaire; Mr. Icahn,
who challenged the price and made some money along the way;
mutual-fund company
T. Rowe Price Group Inc.
and hedge
fund Magnetar Capital LLC.
It also stoked a debate over the merits of public
versus private corporate ownership.
The judge, Vice Chancellor J. Travis Laster of
Delaware’s special corporate court, on Tuesday ruled that Dell was
worth more than $31 billion, compared with the $25 billion that Mr.
Dell and private-equity firm Silver Lake paid to take the Texas
company private.
But the victory is a hollow one for former Dell
investors, few of whom are eligible for compensation due to the
intricacies of Delaware law.
All told, the buyers likely will owe a handful of
former shareholders who challenged the deal about $35 million,
including interest. Magnetar stands to collect about $25 million.
It could have been more costly for Dell and Silver Lake
if not for an odd twist of fate. T. Rowe Price, despite its outspoken
opposition to the deal, mistakenly voted in favor of it, disqualifying
the firm from receiving about $190 million for its 30 million shares.
Tuesday’s ruling serves as ammunition for critics of
management buyouts, in which a company executive typically teams with
others to buy out public shareholders and operate the company as a
private entity. To some, these deals are inherently suspect because
insiders can understand a company’s prospects and potential better
than public stockholders do.
“Guys like Michael Dell know what’s going on better
inside the company than anyone on the outside,” said Ryan Hummer, a
portfolio manager at Ancora Advisors LLC, a Cleveland-based investment
fund that stands to collect more than $1 million on its Dell shares.
“You see these situations where management swoops in to get a good
deal right before there’s a change in the business.”
Representatives for Dell and Silver Lake declined to
comment, as did a representative for T. Rowe Price. The buyers argued
in court that the deal price, which most shareholders voted to accept,
was fair.
Mr. Icahn said: “It just points out again the great
problem we have with too many boards in America not giving a damn
about their shareholders.”
In a 2014 op-ed for The Wall Street Journal, Mr. Dell
criticized what he called the short-term demands of being public and
said that Dell, then a year into its life as a private company, “now
has the freedom to take a long-term view.”
Last October, Dell agreed to buy
EMC Corp. for $67 billion, the
largest purely technology merger in history. To critics of the earlier
buyout, the takeover deal reflected a financial wherewithal that
suggested Dell’s business outlook had improved.
Mr. Dell founded his company in 1984, when he was 19
years old. It became for a time the world’s biggest PC maker by
computers sold, and shares peaked in 2000 during the dot-com boom. But
by the end of the decade, the company was struggling as consumers
moved to mobile devices and corporate clients turned to cloud
computing.
When the original buyout agreement was struck in 2013,
Mr. Dell and Silver Lake argued that Dell was facing stiff challenges
and losing ground to rivals. Part way into a transition from a PC
maker to a purveyor of business software, storage and services, Dell’s
share price continued to slide. Mr. Dell later testified in the
lawsuit that “the harder we worked…the more the stock price went
down.”
But some investors felt the price was too cheap. The
shares had fallen about 30% in the year, meaning the buyout would have
locked in steep losses for longtime holders.
One of them, Southeastern Asset Management Inc., went
public with its dissent. The firm argued the company was valued at
almost twice what Mr. Dell and Silver Lake had offered. Mr. Icahn, the
activist investor, joined the fray, and the two solicited votes
against the transaction.
Institutional Shareholder Services Inc., the advisory
firm whose recommendations can make or break mergers, endorsed the
offer, saying the risks to Dell pulling off a transformation were high
and that the business remained deeply challenged. It wrote: “If your
CEO is willing to buy your falling knife for the privilege of catching
it, there is probably a price at which you should let him.”
Shareholders weren’t persuaded. They eventually
approved the deal, but only after Mr. Dell kicked in another 10 cents
a share and after the board changed the vote-counting rules to ease
the deal’s passage.
Some critics, including T. Rowe Price, later sued for a
higher price, arguing that the buyout had robbed public investors of
sharing in the fruits of Dell’s potential turnaround.
Following a weeklong trial in October, Mr. Laster—known
in the corporate legal world for attention-grabbing decisions—found
that Dell’s shares were worth $17.62 at the time of the deal, versus
the $13.75 a share that Mr. Dell and Silver Lake paid.
Such lawsuits, known as “appraisals,” were once little
used but have become popular in recent years, particularly among hedge
funds looking to squeeze extra profits from a surge of corporate
buyouts. Forty-three appraisals were filed last year in Delaware,
representing a record $2.3 trillion in face-value claims. That is up
from 16 cases valued at $129 billion in 2012, according to a Wall
Street Journal review of court filings.
—David Benoit contributed to this article.
Write to
Liz Hoffman at
liz.hoffman@wsj.com
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