Wed Jun 1, 2016 4:50am EDT
U.S. court rules $24.9 billion Dell buyout underpriced by 22 percent
Dell logos are seen at its
headquarters in Cyberjaya, outside Kuala Lumpur in this
September 4, 2013 file photo.
Michael Dell and Silver
Lake Partners underpriced their 2013 $24.9 billion buyout of Dell Inc by
about 22 percent and may have to pay tens of millions to investors who
opposed the deal for the computer maker, a Delaware judge ruled on
The ruling, which applies
to about 5.5 million Dell shares, is a victory for the specialized hedge
funds that have increasingly tried to squeeze more money from mergers
using a type of lawsuit known as appraisal.
The lawsuits allow
investors who oppose a deal, such as the bitterly contested Dell buyout,
to sue and ask a Delaware judge to determine a fair deal price.
Activist investor Carl
Icahn urged Dell shareholders to vote down the deal and take their case
for fair value to court. Initially appraisal was sought for about 40
million shares, but the bulk was removed for procedural reasons.
In Tuesday's ruling, Vice
Chancellor Travis Laster said fair value was $17.62 per share, not the
$13.75 per share deal price.
With interest, investors
who sought appraisal will collect about $20.84 per share.
The Dell investors
presented evidence that fair value was $28.61 per share, which would have
cost Michael Dell and Silver Lake hundreds of millions of dollars. The
buyers contended that fair value was $12.68.
Dell and a lawyer for the
stockholders, Stuart Grant, declined to comment. Tuesday's ruling can be
Laster said the Dell
buyout took advantage of a dip in the company's stock price and its board
never determined the intrinsic value before negotiating.
"The original merger
consideration was dictated by what a financial sponsor could pay and still
generate outsized returns," wrote Laster.
The judge dedicated much
of the opinion to explaining why deal price was not a fair value
indicator, particularly in a management-led buyout. Delaware judges had
used deal price in appraisals involving the closely watched buyouts of
Ancestry.com in 2012 and BMC Software Inc in 2013.
The added cost to the
buyers from Tuesday's ruling is about $36 million.
About 3.9 million
appraised shares were held by affiliates of Magnetar Capital.
A small number of hedge
funds have built a strategy of swooping in just before a deal closes, when
there is less risk a deal would collapse, and buying stock for the sole
purpose of seeking appraisal.
Investors who seek
appraisal do not get paid at the deal's closing, but they collect interest
of 5 percentage points above the federal discount rate while the case is
pending. The U.S. Chamber of Commerce has complained that that encourages
hedge funds to bring cases because they can earn a return even when a deal
price is found to be fair.
One of the biggest losers
from the Dell case may be T Rowe Price, one of the few mutual fund
managers to test the appraisal strategy.
Dell was able to knock
out T Rowe Price's stock, which comprised the bulk of the shares in the
case, because the fund manager mistakenly voted in favor of the buyout.
T Rowe Price stood to
collect around $190 million if its Dell stock had been appraised. Laster
also ruled on Tuesday the fund manager was not entitled to interest on its
"T Rowe Price runs mutual
funds and allocates capital, but they may regret trying to do this
themselves," said Minor Myers, a professor at Brooklyn Law School in New
York. "This is just one of the pitfalls with appraisal, and it's not for
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