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.”
