Law360, New York
(September 10, 2013, 1:08 PM ET) -- Carl Icahn on Monday gave up
his fight against
Dell Inc.'s $25 billion buyout, but vowed to let a judge
decide how much his shares are worth. And a new report out
Tuesday from a group of equally disgruntled investors suggests
the odds of a price bump are good.
The report finds that in the vast majority of Delaware appraisal actions, a judge has set a "fair value" of the shares higher than the buyout price. In only eight cases in the past 20 years has a judge awarded less — and none quite like Dell's buyout by its founder and CEO.
The analysis was done by lawyers at Fish & Richardson PC on behalf of the Dell Valuation Trust, a novel effort to help organize Dell investors who want to seek appraisal rights. The trust is run by the Shareholder Forum, a loose affiliation of institutional investors headed up by Gary Lutin, a former investment banker turned governance hound.
The trust provides a platform for shareholders who think Dell is worth more than the $13.88 per share that Michael Dell and private equity firm Silver Lake Partners are paying. That's an argument that Icahn, who owns about 8.2 percent of the technology company, has been making for nine months.
In appraisal actions, judges consider a company's intrinsic fair value, ignoring questions of price and board process that tend to dominate merger litigation. In fact, in the 2010 Golden Telecom decision, the Delaware Supreme Court explicitly said judges needn't defer to the offer price, even as a benchmark. Trial courts essentially have a blank slate, relying heavily on financial metrics and expert testimony.
Forty-five appraisal cases have been decided in Delaware since the early 1990s, and in only eight cases did a judge set a “fair value” below the transaction price. And in those cases, the Fish & Richardson analysis finds, the buyer was paying for some extra value, like cost savings or the chance to settle disputes with affiliates.
“Because the buyer’s valuation in those cases was based on benefits beyond the standalone enterprise value, the price they were willing to offer was more than the fair value of the company by itself,” the memo said.
Management buyouts like Dell's don't fit the bill, the group claims. Inside acquirers aren't chasing synergies or an end to corporate squabbling, but instead are guided by a belief — and access to privileged information — that the company is worth more than its current market value.
“Management buyers, after all, can be expected to know their company’s intrinsic value best and are not likely to convince the court that they knowingly offered to pay more than the company was worth," the report said.
Still, plenty of people have made the opposite argument. CEOs like Michael Dell may very well be overpaying for their companies, blinded by loyalty, a desire to protect their legacy and a belief that they can turn it around. A close read of Dell's story suggest this might be true. When Silver Lake, which has its own investors to think about and no emotional connection to Dell, balked at raising the offer, Michael Dell dug into his own pocket for an extra $190 million.
The question will soon be before a Delaware judge, likely Chancellor Leo E. Strine Jr., who is also hearing Dell's shareholder class action.
The following appraisal actions resulted in shareholders getting less than the offer price:
Gerreald v. Just Care (2012): Just Care Inc., a privately held operator of halfway houses, was acquired in 2009 by a company founded by Just Care's former CEO, as part of a long-running management spat. The offer price was $40 million. In an appraisal action, Just Care's shareholders claimed the fair value was $55.2 million, while the defendants said it was $33.6 million. The court landed on $34.2 million.
Highfields Capital v. AXA Financial (2007): Hedge fund Highfields Capital turned down a $31-per-share offer for its stock in insurance broker MONY Group Inc. by AXA Financial, only to have a judge decide the shares were only worth $24.97. Even with accrued interest — shareholders are entitled to 5 percent plus the federal funds rate — Highfields lost money.
Finkelstein v. Liberty Digital Inc. (2005): John Malone's Liberty Media Corp. acquired its digital affiliate in 2002 for cash valued at $3.31 per share. Notably, the parties agreed that the fair value of all but one of Liberty Digital's asset was $2.15 per share, but disputed the value of a contract with AT&T Inc. Then-Vice Chancellor Strine slapped a $135 million price tag on the contract to come up with a $632 million valuation for all of Liberty Digital — $133 million less than the purchase price.
Andaloro v. PFPC Worldwide (2005): PFPC Worldwide was acquired by its parent, which already owned 98 percent, for $34.26 per share. A few shareholders wanted more, pegging the fair value at $60.76. The buyer said it was more like $19.86. Using discounted cash flow projections and comparisons to peer companies, the court landed on $32.81.
Union Illinois 1995 Inv. Ltd. Partnership v. Union Financial Group (2004): The founding family of Union Financial owned 38 percent of the bank when it was acquired by First Banks Inc. in 2001. They sought an award of more than $16 per share, well above the merger price of up to $11. Then-Vice Chancellor Strine settled on $8.74 per share, the merger price minus synergies.
Grimes v. Vitalink Communications Corp. (1997). Vitalink, a maker of network routers, was bought by a larger rival in 1991 for $146 million. Owners of about 200,000 shares dissented and demanded appraisal. The two sides sparred over Vitalink's sales projections, future tax rate and peer valuations, with shareholders demanding $13.32 per share and the company saying they were worth only $8.50. Then-Vice Chancellor Chandler agreed with the company.
Kleinworth Benson v. Silgan Corp. (1995): Silgan, a can and jar maker, was bought out by its holding company in 1989 for $6.50 per share. Stockholders disputed William Blair & Co.'s fairness opinion and claimed their shares were worth $12.65 apiece, while Silgan said fair value was just $4.88. Then-Vice Chancellor William Chandler III used discounted cash flow to arrive at $5.94 per share, about 10 percent below the buyout price.
Cooper v. Pabst Brewing Company (1993): Pabst was trading at around $14 per share when it was acquired by Heileman for $29.50 per share. Setting aside the hefty control premium, the court said the stock was actually worth $27 per share.
The Dell Valuation
Trust is represented by Jeremy D. Anderson and José P. Sierra
of Fish & Richardson PC on appraisal matters and by
Bingham McCutchen LLP on securities regulatory matters.
--Editing by John Quinn.