Thursday, March 7, 2013

There is no need to worry about Dell s big deal


Michael Dell roiled Wall Street by announcing last month that he and the private-equity firm Silver Lake Partners would be taking his eponymous home-computer maker private. The deal raised many questions — most important, whether Dell, by far the largest shareholder, and Silver Lake were paying Dell's fellow shareholders a fair price for their stock. Gretchen Morgenson, writing about the need for an independent, third-party financial evaluation of Silver Lake's and the management's $24.4 billion proposal for Dell, too got it terribly wrong in a New York Times piece. For those who came away from the Morgenson column with the impression that Michael Dell might be stealing his own company , I'll recount what happened. 
The Back story
In August 2012, Dell, a 48-year billionaire , told his board of directors, of which he was the chairman, that he was considering making a proposal , with a to-be-determined private-equity firm, to buy the 86% of the company he didn't already own. Immediately, the board formed a four-member "special committee" to evaluate Dell's proposal on behalf of the outside shareholders of the firm. The special committee explored all options in search of maximising shareholder value: Should the company stay public and continue to execute its business plan?

Should it modify its business plan? Should the company do a "leveraged re-cap" — take on some debt and pay out a dividend to shareholders — while the stock remained publicly traded? Should the company sell assets, such as its financialservices arm or its personal-computer business? Should Dell sell itself to another company? 

Raised bid
In late October, the special committee started negotiating with Silver Lake as well as another private-equity firm that was considering buying Dell. While the specifics have not yet been released, the committee asked both private-equity firms to increase their initial bids in order to stay in the process. Silver Lake raised its bid; the other dropped out. The committee then invited a third private-equity firm to perform due diligence and to make a bid for the company. But after a few weeks spent studying Dell from the inside, it also dropped out. Then the special committee sat down to negotiate a final price and a contract with Silver Lake.

At one point, the committee got Silver Lake to increase its final price to $13.65 per share after Michael Dell agreed to value his shares at $13.36 per share, a 2.2% haircut that cost him a cool $71 million of value. Not material to a billionaire , perhaps, but a nice gesture. Michael Dell made another concession to the special committee: That a majority of the non-management shareholders would need to approve the deal for it to happen, essentially silencing his own millions of votes. There's more. The committee hired Evercore Partners, the investment-banking firm, to find a higher bid for Dell, if possible. Evercore has 45 days to find a better offer. The committee also negotiated a minuscule breakup fee of $180 million that would go to Silver Lake if the deal fell through.

This means anyone wanting to top the Silver Lake deal would only have to pay an additional dime, or so, per share to do so, chicken feed in this context. Although the $13.65 per share offer for Dell was a 37% premium to the average closing price of Dell stock during the previous three months, it is not a surprise that some shareholders want a higher price. When it comes to a buyout offer, more is always better. But to suggest that the committee didn't do its job is an insult.

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