Chancery Values Dell Stock Nearly $4 Above
$25B Deal Price
Wilmington (May 31, 2016, 12:04 PM ET) -- A Delaware Chancery judge ruled
Tuesday that the fair value of
Dell stock at the time of its $25 billion take-private deal was $17.62
per share, nearly $4 higher than the transaction price, but not nearly as
high as the $28.61 shareholders who pushed for appraisal were seeking.
In a detailed 115-page opinion, Vice Chancellor J. Travis Laster wrote
that while the deal price of $13.75 per share was an important factor in
determining the fair value of Dell’s shares, there was enough evidence
presented during a four-day appraisal trial in October that suggested
there was a “valuation gap” between transaction price and actual intrinsic
Part of that evidence included a showing that the original buyout offer
led by founder and CEO Michael Dell had considered what a financial backer
would be willing to pay and still generate “outsized returns,” as well as
the market’s perception of what the company was worth contrasted by its
“operative reality,” and the effect of “anchoring” what could be a
depressed share value to transaction negotiations, Laster wrote.
“When a company with a depressed market price starts a sale process, the
anchoring effect makes the process intuitively more likely to generate an
undervalued bid,” the vice chancellor’s opinion states. “Market myopia can
accentuate this problem. Investors focused on short-term, quarterly
results can excessively discount the value of long-term investments. The
record at trial demonstrated that a significant valuation gap, investor
myopia, and anchoring were all present in this case.”
Laster states that there was no evidence Michael Dell or his management
team tried to create a depressed value and take advantage of it, and said
the deal would “sail through” if it were examined as a breach of fiduciary
duty case. But the company had a long-term transformational strategy from
its reputation of being planted in the shrinking personal computer market
— seeking to expand into other areas to compete with the exploding
smartphone and tablet space that had eaten into its business — and there
was "compelling evidence" of a disconnect between the market’s view of
Dell and its intrinsic value, the opinion states.
Shareholders who petitioned for appraisal of their stock, which included
T. Rowe Price, had argued the price of Dell
should be even higher, with their
experts at trial pegging the actual share-price value at $28.61.
On the Dell side, its expert thought the price should
be even lower than the deal consideration, setting it at $12.81, and the
vice chancellor essentially took those two opinions, which show a roughly
$28 billion valuation gap between them, and split the difference.
“Having no reason to prefer one realistic case over the other, this
decision weights them equally,” Laster wrote.
The vice chancellor called the Dell expert’s opinion “conservative,” while
he said the petitioners expert was “optimistic,” and averaged out the data
where it conflicted to come to a fair value of $17.62.
“This approach has the additional benefit of arriving at a cost-savings
number that is closest to management’s best estimate of what the company
believed was attainable at the time of the merger,” the opinion states.
Representatives for the sides did not immediately respond to requests for
Laster’s decision means that shareholders who petitioned for appraisal are
due an extra $3.87 per share, plus interest. Meanwhile, the bulk of the
petitioners remain ineligible for any relief unless
an earlier ruling in the case is
overturned by the Delaware Supreme Court.
Earlier this month, the vice chancellor ruled that funds run by T. Rowe
Price, one of the largest petitioners, was not eligible for appraisal
because it technically, through a series of intermediaries, voted in favor
of the deal, even though it has steadfastly opposed the merger.
Under Delaware law shareholders are only able to exercise their appraisal
rights if they haven’t voted in favor of it or made any public statements
T. Rowe Price
blamed the discrepancy on
a “computer glitch” and that the court should take its actual desire to
oppose the deal into consideration, but Laster ruled that an investor
assumes such a risk if it uses intermediaries in its voting practices.
Dell is represented by Gregory P. Williams, John D. Hendershot, Susan M.
Hannigan and Andrew J. Peach of
Richards Layton & Finger PA and John L. Latham, Susan E. Hurd, Gidon
M. Caine and Charles W. Cox of
Alston & Bird LLP.
The petitioners are represented by Stuart M. Grant, Michael J. Barry,
Christine M. Mackintosh, Jennifer A. Williams and Rebecca A. Musarra of
Grant & Eisenhofer PA.
The case is In re: Appraisal of Dell Inc., case number 9322, in the Court
of Chancery of the State of Delaware.
--Editing by Rebecca Flanagan.
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