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The Shareholder Forumtm

special project of the public interest program for

Fair Investor Access

Supporting investor interests in

appraisal rights for intrinsic value realization

in the buyout of

Dell Inc.

For related issues, see programs for

Appraisal Rights Investments

Fair Investor Access

Project Status

Forum participants were encouraged to consider appraisal rights in June 2013 as a means of realizing the same long term intrinsic value that the company's founder and private equity partner sought in an opportunistic market-priced buyout, and legal research of court valuation standards was commissioned to support the required investment decisions.

The buyout transaction became effective on October 28, 2013 at an offer price of $13.75 per share, and the appraisal case was initiated on October 29, 2013, by the Forum's representative petitioner, Cavan Partners, LP. The Delaware Chancery Court issued its decision on May 31, 2016, establishing the intrinsic fair value of Dell shares at the effective date as $17.62 per share, approximately 28.1% more than the offer price, with definitive legal explanations confirming the foundations of Shareholder Forum support for appraisal rights.

Each of the Dell shareholders who chose to rely upon the Forum's support satisfied the procedural requirements to be eligible for payment of the $17.62 fair value, plus interest on that amount compounding since the effective date at 5% above the Federal Reserve discount rate.


 

Forum reference:

Columnist's observations about having correctly evaluated Dell buyout

 

For other reports of the referenced decision and related court filings, see the "Appraisal of Fair Value" section of the Dell project's reference page.

 

Source: Barron's, June 11, 2016 commentary

 

Follow Up

Michael Dell’s $6 Billion Holdup

A judge recently ruled that Michael Dell and Silver Lake underpaid Dell shareholders by $6 billion.


June 11, 2016


A Delaware judge’s recent ruling that Michael Dell and Silver Lake Partners shortchanged public shareholders in the $25 billion leveraged buyout of Dell in 2013 vindicates the many critics of that dubious transaction, including Barron’s.

Travis Laster, a Delaware chancery court judge, ruled that the fair value for Dell, the PC, software, and services provider, was $17.62 a share, rather than the price of $13.75 paid to shareholders by Michael Dell and his buyout partner, Silver Lake. That means public shareholders were shortchanged by $6 billion. But Dell and Silver Lake will pony up only a fraction of that amount—some $25 million plus $17 million in interest—because fewer than 1% of Dell shareholders participated in the arduous appraisal process that led to the ruling.

 

T. Rowe Price Group (ticker: TROW), a holder of 31 million Dell shares and a chief critic of the deal, was ruled ineligible to benefit from the appraisal ruling because it mistakenly voted in favor of the merger. (For the back story on that, see Fund of Information.) T. Rowe will compensate fund shareholders for the error to the tune of $194 million.

Dell was taken private after a highly contentious nine-month battle during which numerous large shareholders, including billionaire activist Carl Icahn and Southeastern Asset Management, argued that Michael Dell had taken advantage of Wall Street’s pessimism about the PC market to significantly underpay for the company. Facing strong opposition and a likely defeat in a shareholder vote, Michael Dell got the Dell board to make a key change in the voting rules in return for a token increase in the deal price, allowing his lowball offer to prevail.

Barron’s wrote many critical articles about the LBO drama, including a cover story (“Not So Fast, Michael,” April 1, 2013) in which we argued that Dell and Silver Lake were trying to steal the cash-rich company and that Dell’s real motivation was greed rather than a stated need to reposition the company outside the glare of public ownership.

In a well-reasoned 114-page decision, Judge Laster made a distinction between the price paid by Dell and Silver Lake, which was based on LBO (leveraged buyout) models that aim to produce multiyear returns of at least 20% to the buyers rather than fair value. In other words, the price was what the buyers wanted to pay, not what the company was worth.

The judge noted that the special committee of Dell’s board that oversaw the sales process never focused on conventional valuation methods, such as discounted cash flow or book value, but looked simply at the deal price relative to then-depressed Dell share price.

Dell’s financial performance since the deal appears to support our view that Michael Dell and Silver Lake stole the company. Based on limited public financial reporting, Dell has generated significant cash from operations and paid down debt despite the challenges in the PC business.

Net debt was down to $8 billion on Oct. 31, 2015, from $11 billion on Jan. 31, 2014. And that’s before the $3 billion sale of an information-services business and an IPO of a software business worth $1 billion. Adjusted pretax cash flow—earnings before interest, taxes, depreciation, and amortization—was $659 million in the most recent quarter, up 28% from a year earlier.

Dell’s success since the LBO probably means that Michael Dell and Silver Lake have earned a multiple of their equity investment. It also has enabled Dell to reach a $63 billion deal to buy the larger EMC (EMC), a transaction that appears on track to close this summer. Within a few years, Dell likely will be public again and it then should be apparent just how lucrative the LBO really was.

—Andrew Bary

 

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This project was conducted as part of the Shareholder Forum's public interest  program for "Fair Investor Access," which is open free of charge to anyone concerned with investor interests in the development of marketplace standards for expanded access to information for securities valuation and shareholder voting decisions. As stated in the posted Conditions of Participation, the Forum's purpose is to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant is expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

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