May 7, 2013
Dealpolitik: The Ominous Commonalities
Between Dell and Clearwire
Going-private transactions in
which a controlling stockholder or management buys out the public
shareholders almost always result in post-announcement grumbles and groans
(including in this column). But at the end of the day, if the independent
directors have done as a good job as they can under the circumstances, their
judgment is generally accepted by shareholders. That may be changing.
Dell have very different businesses and each faces their own unusual
Clearwire is rich in spectrum but starved of cash to develop it and
customers to exploit it. Dell has plenty of cash but strategically finds
itself in the midst of a migration away from its traditional PC business.
Yet despite these differences, these deals have run into headwinds with some
Both drew surprise competing bids. Blackstone made the unusual move to
explore jumping another PE firm’s signed deal, a challenge so rare of in the
world of PE investors that the major players have been sued for the lack of
competition. (They dispute the allegations.)
And Clearwire drew a competing bid even though Sprint owns a majority of
Clearwire shares. Conventional wisdom is that once a shareholder can block
shareholder approval, there is no opportunity for a competing bid. Dish
tried to get around this by proposing spectrum purchases and contractual
arrangements that could be implemented without any shareholder vote.
Both of those competing overtures has either been withdrawn or is not being
pursued: Blackstone’s as a result of its view of the decline of Dell’s
business and Dish’s because of its decision to try to buy Sprint (and
through Sprint, Clearwire).
But while Blackstone’s and Dish’s bids have gone away, they continue to cast
a shadow on the existing deals by affecting shareholder expectations and
raising process questions.
Directors of both companies seem to have lost credibility with at least some
of their shareholders by shifting away from the typical cheerleading in
which management trumpets a company’s future prospects. Some moderation of
management optimism is to be expected once a board has voted to sell a
company as the board looks to justify the deal
But in the case of Dell, the special committee’s transformation of its views
goes much further than normal. It has clearly lost confidence in
management’s ability to accurately forecast results and appears deeply
skeptical about management’s strategy and its ability to implement it. Such
a negative view of management—which, after all, consist of the people trying
to buy the company—is unusual, if not unheard of.
The transformation is particularly remarkable because three months before
greenlighting Mr. Dell’s LBO, the board’s compensation committee, in
justifying senior executives’ compensation, had cited Dell’s “strong
financial results for Fiscal 2012.” In discussing the business strategy the
committee said “Management is committed to this transformation as it has
Some shareholders seem to think the loud cries are a convenient way to
justify a sale price that the shareholders consider too low.
Dell’s special committee has maintained it conducted a thorough process and
evaluated “the full range of strategic and financial alternatives available
to the company.” It has said the agreed-upon deal shifts any risks about the
future of Dell to the buyout group while providing the shareholders an
acceptable return. And it has pointed to the decline in Dell’s business as a
source of its concerns.
the case of Clearwire, that board’s special committee appears to think the
company is running out of options and, perhaps more importantly, is out of
money. Although Clearwire says it should have funding through year end, it
is talking about defaulting on a significant interest payment this summer.
There appears to be a sense among some shareholders of these companies that
the directors may be letting shareholders down.
These two factors, along with other developments, have led to the most
ominous problem for these deals: Shareholder approval of them is not a
foregone conclusion. The problem seems most serious at Clearwire since the
market appears to be predicting that the buyout by Sprint in its current
form will be defeated by shareholders. About two weeks before the Clearwire
shareholders meeting the stock is trading at a level that is more than 10%
over the deal price. (Why would shareholders vote for a cash deal if more
cash were available by selling on the market?) Plus one of Clearwire’s
largest holders is soliciting against the deal.
is too soon to tell what will happen at Dell. The date of the shareholders
meeting has not been announced. Nevertheless, as in the case of Clearwire,
there are several large shareholders which have announced their opposition.
And there is the possibility that Carl Icahn and/or Southeastern Asset
Management will send out their own proxy
statement to try to get shareholders to vote against the deal.
recent years, other transactions have suffered from opposition by activist
hedge funds. Those hedge funds generally agitate because they want to
negotiate an increase in price. But the level of opposition at each of
Clearwire and Dell is unusual. The shareholders are not just seeking a
marginal increase in price but are raising issues related to the basic
premises and structures of the deals as well.
These are not happy thoughts
for future proponents of going-private deals. Nor will the lambasting the
Dell and Clearwire special committees are experiencing encourage special
committees to charge ahead with such deals in the future.
Copyright ©2013 Dow Jones & Company, Inc. All Rights