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Ultimate Investor Interests in Rights to Long Term Value
Since most Forum
participants are professionals responsible directly or indirectly for
the investment interests of ultimate beneficiaries, I took advantage
of the rare opportunity for us to get the views of a “real individual”
participant by asking Darsh Khusial to elaborate on his statements
about long term value objectives reported in this past Sunday’s New
York Times column about the Dell appraisal case.[1]
Mr. Khusial’s perspective can be considered typical of an individual
making investments for his own future security. He is a relatively
sophisticated and informed investor, though, being a careful
practitioner of value investing principles with considerable industry
expertise as a leading software architect currently on educational
sabbatical from one of the major companies in Dell’s market. It should
be noted that Mr. Khusial is not a petitioner, which is also typical
of the majority of both individuals and fund managers who seek
appraisal by relying upon on the investors who volunteer as
representative petitioners to guide the court proceeding. This is how
he views his right to appraisal of an important part of his savings:
As a value investor, I decided to become a shareholder when I observed
Dell was selling far below its intrinsic value. The proliferation of
tablets and smartphones fanned the sentiment that the PC was dead
which resulted in the price of Dell shares being depressed. Like Mr.
Dell, I didn't believe that the PC was dead and would be overrun by
smartphones and tablets. For consuming content these other devices
were more efficient. But, to produce, support and stream that content
it is still more practical to use a PC or server. When clips are shown
of the development shops from Silicon Valley companies you observe
programmers using a laptop or desktop to code, not hammering out lines
of code using their smart-phones.
Since the approval of the buyout, the PC industry cycle could be
observed from the latest earning news from the largest players in the
industry such as Intel and Microsoft. People inside the business as
well as large company IT departments were aware of it before from the
order planning and training for required upgrades that had to be
initiated well in advance of the end of Windows XP support. The PC is
not dead; its refresh cycle is just much longer than before. As a
result the shares of Intel and Microsoft have appreciated considerably
since the date of the Dell buyout approval. I suspect if the market
had understood this cycle Dell stock would have been trading
significantly above the buyout price.
When Mr. Dell and Silver Lake decided to take Dell private, I
initially thought that as a minority shareholder I had no alternative
but to accept the offering price proposed. Their price was far below
what I thought it was worth and I was resigned to relinquishing my
Dell shares at an unfair price. However, subsequently, I read the June
2013 New York Times column by Gretchen Morgenson on demands for
appraisal rights and was excited about that route. I subsequently
contacted The Shareholder Forum, which was mentioned in the article,
and after learning more about it decided that appraisal rights were a
practical and fair way to realize the intrinsic value of my
investment.
As part of the appraisal process, the recent demand by Dell for all
the records of investors who have volunteered as “petitioners” seems
inefficient and impractical. The records demanded include such items
as handwritten notes and instant messages from January 1st, 2011 to
May 10, 2014. This is unjust and unreasonable.
Even more concerning is
the inefficiency with regard to the objective of determining a fair
price. We have different views on the valuation of Dell. Determining
the intrinsic value of a company is an art, not a science. Hence, we
would expect different opinions. However, trying to resolve this
situation by having “petitioners” produce all documents since the
start of 2011 seems designed to make the appraisal process an
impractical option. Why would a “petitioner” agree to the monetary and
opportunity cost of such an action. It would seem irrational in a
competitive marketplace to reveal their 'secret sauce' of how they
approach the valuation of a company. As for Dell, receiving and
processing these documents from petitioners is very inefficient. We
are just interested in what is a fair price for the value of the
shares not all the noise and chatter that occurred over the 3 plus
years to come to a valuation conclusion. The Dell approach appears to
be one where every petitioner’s communication is analyzed over the
last 3 plus years to point out why their valuation is incorrect. The
simpler solution would be for an expert to give an opinion on the
valuation.[2]
If Dell is successful in demanding that “petitioners” produce all the
documents they outlined, it would be a blow to all minority
shareholders demanding appraisal rights. One of the few options
minority investors have in a buyout would become inefficient and
possibly too impractical to be rationally employed.
Thanking Mr. Khusial for so generously offering his views, I invite
your responsive comments.
GL – July 24, 2014
Gary Lutin
Chairman, The Shareholder Forum
575 Madison Avenue, New York, New York 10022
Tel: 212-605-0335
Email:
gl@shareholderforum.com
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