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Michael Dell roiled Wall
Street and the technology industry 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 -- yet
I’ve read little in the business press that tackled them satisfactorily.
William D. Cohan is the author of the recently released "Money and
Power: How Goldman Sachs Came to Rule the World" and the New York
Times bestsellers "House of Cards" and "The Last Tycoons."
Cohan
is a contributing editor at Vanity Fair and writes frequently for
Financial Times, Fortune, The Atlantic and The Washington Post. He
worked on Wall Street as a senior mergers and acquisitions banker
for 15 years. He also worked for two years at G.E. Capital. Cohan
is a graduate of Duke University, Columbia University School of
Journalism and Columbia University Graduate School of Business.
"The Last Tycoons" won the 2007 Financial Times/Goldman Sachs
Business Book of the Year Award.
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So I was pleased to open
my
New York Times last week to see that Gretchen Morgenson, the Pulitzer
Prize-winning financial columnist,
was delving into the Dell Inc. deal. Thanks to her long tenure, sharp
insights and willingness to speak truth to power, she is arguably the most
respected financial writer around.
Yet this time my pleasure
turned to dismay. 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, got it terribly wrong.
This is not because the
need for a powerful independent voice representing non-management
shareholders is a boneheaded idea. Rather, it’s such a good and important
idea that the Dell board had already thought of it, and done it. Morgenson
acknowledged this in passing, but nonetheless said that “investors would
benefit” from a new investigation by something called the Shareholder
Forum, a “nonpartisan” (whatever that means in this context) organization
headed by a former investment banker, Gary Lutin, that says it supports
“investor access to decision-making information.”
Shareholder
Interests
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
really happened over the last few months. The facts should give comfort to
Dell shareholders otherwise worried that nobody was looking out for their
interests while the deal went down.
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 percent of the company
he didn’t already own. Immediately, as is appropriate under the
circumstances, the board formed a four-member “special committee” to
evaluate Dell’s proposal on behalf of the outside shareholders of the
firm. As its chairman, the directors selected Alex Mandl, a former
telecommunications executive whom I know as an extremely honorable man
from my days as an investment banker. The special committee consisted of
three other people I don’t know, but who from all accounts are also highly
respected: Ken Duberstein, a former chief of staff to President Ronald
Reagan; Laura Conigliaro, a former technology analyst and partner at
Goldman Sachs Group Inc.; and Janet Clark, the chief financial officer at
Marathon Oil Corp.
The special committee has
met more than 25 times, according to Dell’s public filings, including
participating in six board meetings with only the independent directors
present (meaning without Michael Dell, the board’s chairman.) Working with
JPMorgan Chase & Co., its financial adviser; Debevoise & Plimpton LLP, its
legal adviser; and an unidentified management consultant who was hired to
conduct a strategic review of the company, the committee spent five months
considering a variety of alternatives to what Dell was proposing.
It explored all options in
search of maximizing 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 financial-services arm
or its personal-computer business? Should Dell sell itself to another
company or consider a merger?
Raised Bid
In late October, the
special committee started negotiating with Silver Lake as well as another
(unidentified) private-equity firm that was also considering buying Dell.
While the specifics of the bidding have not yet been released publicly
--that will likely be explained more fully in the proxy statement to be
filed in May before the shareholder vote -- the special 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 firm 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 Inc. (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 own
shares at $13.36 per share, a 2.2 percent haircut that cost him a cool $71
million of value. Not material to a billionaire, perhaps, but a nice
gesture all the same.
Michael Dell made another
important 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.
But wait, there’s more.
The special committee then hired
Evercore Partners Inc. (EVR), the investment-banking firm, to find a
higher bid for Dell, if possible. Evercore has 45 days (and perhaps even
longer under some circumstances) to find a better offer; its compensation
is heavily skewed toward doing just that. The special committee also
negotiated a minuscule breakup fee of $180 million that would go to Silver
Lake if the deal fell through, far less than the 3 percent of equity value
that has become a norm. 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 percent premium to the average closing price
of Dell stock during the previous three months, and JPMorgan deemed the
price “fair” from a financial point of view, it is not a surprise that
some shareholders -- such as Southeastern Asset Management Inc., the
second-largest shareholder -- want a higher price. Of course, they do.
When it comes to a buyout offer, more is always better.
To suggest that the
special committee didn’t do its job is an insult to its members and to its
advisers, who certainly appear to be working very hard to get the best
deal for all shareholders. If you have Dell stock and you don’t like
Silver Lake’s deal, the solution isn’t to get another valuation. The
solution is to vote down the deal and live with the consequences.
(William D. Cohan, the
author of “Money and Power: How Goldman Sachs Came to Rule the World,” is
a Bloomberg View columnist. He was formerly an investment banker at Lazard
Freres, Merrill Lynch and JPMorgan Chase. The opinions expressed are his
own.)
To contact the writer of
this article: William D. Cohan at
wdcohan@yahoo.com
To contact the editor
responsible for this article: Tobin Harshaw at
tharshaw@bloomberg.net
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