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Source: New York Times, February 24, 2013 column

Business Day


Fair Game

Dell’s Intentions Get a Hard Look

IS Michael Dell trying to take over the computer company he founded on the cheap?


Fair Game

Gretchen Morgenson writes the Fair Game column for the Sunday Business section.

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That’s what more and more Dell shareholders appear to believe about the $13.65 per-share price proposed on Feb. 5 by Mr. Dell and Silver Lake Partners, a technology investment firm. Initial objectors to the buyout have been joined by additional shareholders concerned about getting a fair shake.

The issue of fairness is a hazard of management-led buyouts, of course. Are insiders, who have an enormous information advantage owing to their deep knowledge of a company’s operations, trying to get control of an enterprise when its shares are perhaps temporarily depressed? Over the last year, Dell’s stock has lost 19 percent of its value.

Some investors wonder if Mr. Dell, who owns 14 percent of the shares outstanding, might have a hot new product on the drawing board that has the potential to make the company a highflier again.

Neither management nor Mr. Dell is saying much of anything about the company’s prospects. Last Tuesday, when Dell announced mixed earnings for the year, the company declined to make any projections for coming quarters on the conference call with investors and analysts. Its chief financial officer cited the pending deal as the reason no outlook was given.

As is the case with all insider deals, there’s great potential for outside shareholders to be treated unfairly. Making the deal even more problematic, Dell’s shareholders have little data upon which to assess its price. Dell’s regulatory filings say that the $13.65 per-share price is the result of extensive “bids and arms-length negotiations” between Silver Lake and the special committee of Dell’s board beginning in late October 2012.

Still, there’s no mention of how the $13.65 per-share offer stacks up against the company’s long-term enterprise value, an assessment of future earnings potential that is a typical measure in a takeover. Instead, the offer by Mr. Dell and Silver Lake seems based on the company’s recent stock price. Their $24.4 billion deal represents a 37 percent premium to the stock’s average price over the previous three months, they say.

Meanwhile, Southeastern Asset Management, one of Dell’s largest outside shareholders, estimates that the company is worth $23.72 a share, almost 75 percent more than the buyers are offering. Southeastern has come to that conclusion using publicly available information, however, because that’s all it has access to.

Naturally, both of these parties have a vested interest in getting their price in the deal. Mr. Dell and his group want to pay as little as possible, while long-suffering outside owners hope for more.

Trying to remedy this unsatisfying situation, an uninvolved investor organization has made an excellent suggestion: an independent, peer-reviewed analysis of Dell’s enterprise value should be done on behalf of its outside shareholders. Based on the same information Dell’s management has, such an assessment would assure investors that they are being bought out at a fair value.

This idea comes from the Shareholder Forum, a nonpartisan, independent creator of programs devised to provide the kind of information investors need to make astute decisions. The Forum, overseen by Gary Lutin, a former investment banker at Lutin & Company, suggests hiring a qualified expert to analyze the company’s operations. This would be similar to the so-called fairness opinions provided to shareholders in takeovers by outsiders. The analysis would be subject to confidentiality when necessary and would be reviewed by recognized analysts, academics and other investment professionals.

On Feb. 14, Mr. Lutin sent a letter to Mr. Dell and Alex Mandl, chairman of the special committee of Dell’s board charged with ensuring the deal’s fairness to all shareholders. In the letter, Mr. Lutin asked that the company support the independent analysis and provide assistance in its preparation.

Mr. Lutin said he had assumed that the board committee and Mr. Dell would want to support this project. “Shareholders have a very well-established right to any information relevant to their investment decisions under Delaware law,” Mr. Lutin said last week. “They also have the right to expect management to be responsible for addressing those interests.”

But last week, Mr. Lutin said that lawyers representing Mr. Mandl and his committee told him they would not be supporting the independent analysis.

David Frink, a Dell spokesman, confirmed last Thursday that Mr. Mandl had “respectfully declined to participate” on behalf of the committee in the Forum project. In a statement sent Friday, the special committee said that the Dell and Silver Lake deal was compelling and that “the buyer group will assume the significant risks and uncertainties facing the business.” The committee added that it had hired an investment bank to “determine if there are alternatives that are superior.”

THERE is precedent for such an independent valuation. In 2011, management of Adrian Steel, a closely held company, asked the Shareholder Forum to arrange an independent valuation of the company. It was done in combination with an investor survey to help management gauge outside shareholders’ priorities for possible recapitalization alternatives. The analysis valued the company at around $426 a share, compared with a trading range of $170 to $335 during the previous year.

Frederick E. Rowe Jr., an investment manager at Greenbrier Partners in Dallas, supports the Shareholder Forum’s efforts to provide all investors with a reliable assessment of Dell’s value. A Dell shareholder until a few weeks ago, Mr. Rowe said he sold his shares because he was disturbed by the insider nature of the management-led buyout.

“When shareholders with equal access to the same information make buy and sell decisions, the game is fair,” Mr. Rowe said in an interview last week. “When shareholders, as in this case, are denied access to material information and then forced to sell to a better-informed buyer, the game is no longer fair.”

Mr. Lutin said the Forum’s analysis will go forward regardless of whether Mr. Dell or Mr. Mandl’s committee participates. Maybe Dell will change its mind as it sees how investors would benefit from such an analysis.

“Investors have either an interest in being fully informed or in some cases a fiduciary responsibility to be fully informed,” Mr. Lutin said. “If management doesn’t satisfy their responsibilities for providing adequate information for informed decisions, then the fiduciary is responsible for doing the best he or she can. This independent valuation provides a new ability for investors to be fully informed.”

© 2013 The New York Times Company




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