Deal Professor
| April 23, 2013, 7:30 pm
Flawed Bidding
Process Leaves Dell at a Loss
By
STEVEN M. DAVIDOFF
| |
Harry Campbell
|
The
private equity firm
Blackstone Group has exited the stage for
Dell, abruptly bringing down the curtain on a budding takeover contest.
It has the elements of a farce, and Dell’s board has no one to blame but
itself.
The fizzled bidding for Dell is a result of the
board’s extreme reliance on a process known as a go-shop and how it ran the
initial sale. If this episode does not change the way companies sell
themselves, perhaps it should.
A go-shop is a device that companies started using
about a decade ago. The go-shop typically provides that after a deal is
announced, the target company shops like
Paris Hilton, as a Delaware judge once put it, looking to see if another
bidder is willing to compete.
Why would the first bidder allow this?
The answer lies in its origins. Go-shops were first
used in private equity buyouts. The private equity firm would often team
with management to make a bid, demanding exclusive negotiations. Boards
would agree to this exclusivity but in exchange demand a period of time when
alternative bids could be solicited. This way they could be assured that the
company was being sold for the highest possible price.
Yet there is also plenty of skepticism about this
process. The conventional wisdom is that go-shops are a hollow ritual. The
feel-good perception that the company is being actively shopped covers up
the fact that the initial bidder has a perhaps unbeatable head start. Once a
deal is announced, others don’t have time to catch up, nor do they want to
get in a bidding war. A go-shop becomes just a cover-up for a pre-chosen
deal.
There is truth to this. At least one study has found
that go-shops don’t generally attract higher-valued bids when management and
private equity firms are involved. This makes sense. After all, if the
original bidding group has management locked up, how is a subsequent bidder
going to run the company?
Despite such concerns, the Dell board used both
exclusivity and a go-shop in structuring the sale process, although it did
add some frills to try to protect shareholders further.
Instead of running an open auction contest at the
very beginning, the Dell board negotiated with the private equity firms
Silver Lake Partners and
Kohlberg Kravis Roberts & Company. When K.K.R. dropped out, the board
asked TPG to join the process.
But the board focused on only two bidders at a time
and didn’t reach out to others. Instead, when Blackstone called about a deal
in January, it was left to bid only in the go-shop after it was announced
that
Michael S. Dell and Silver Lake were offering $13.65 a share to take
Dell private.
It is curious that the Dell board adopted the
go-shop process so wholeheartedly. Even in the best of circumstances, they
are seldom successful. Since 2004 there have been 196 transactions with
go-shops in them, according to the research provider FactSet MergerMetrics.
In only 6.6 percent of these did another bidder compete during the go-shop
period. More than 93 percent of deals with go-shops do not attract competing
bids.
You can slot Dell into the overwhelming majority.
The Dell board hired Evercore to run the go-shop, and the investment bank
contacted 71 parties. Now Dell appears left with only
Carl C. Icahn.
It might have turned out differently, if the board
had pulled Blackstone fully into the sale process before the announcement of
an agreement to sell the company to Silver Lake and Mr. Dell. By failing to
include Blackstone — with its growing technology practice that includes a
former executive of Dell — from the get-go, it allowed the go-shop process
to unfold in the harsh glare of the media.
And when your business is something like a melting
ice cube, time matters. A recent International Data Corporation report
showed the PC business in a free fall, with United States shipments down
12.7 percent in the first quarter of this year compared with the previous
year, and Dell falling behind its competitors. The deterioration in the
business was one of the reasons Blackstone decided not to bid.
Hindsight is 20-20, of course. Still, Dell’s board
should have known that how it ran the sale would come under harsh scrutiny.
Dell’s biggest shareholder outside of Mr. Dell, Southeastern Asset
Management, had told the Dell board before the proposed buyout was announced
that it would not support a transaction where it could not roll over its
shares and that was not in the range of $14 to $15 a share, according to a
securities filing. That Southeastern is now heavily protesting this deal is
no surprise.
People close to Dell vigorously defend the sale
process, calling the go-shop a “success” since it brought Blackstone even
this close to bidding.
But Dell’s use of the go-shop now leaves its
shareholders with a hollow choice. Silver Lake and Mr. Dell will most likely
wait it out, possibly raising their offer a quarter or two at the last
minute to win over shareholder holdouts. They certainly have no incentive to
do anything before then or to do much more, if even that. And then
shareholders will be forced to vote between this deal and taking the risk
with a still publicly traded company that Blackstone has now so publicly
spurned. It’s really not much of a choice.
Moreover, there will now be furious lobbying by
Southeastern and Mr. Icahn to have equity stakes in a newly private Dell
rather than take the buyout offer. Southeastern wants to salvage its
investment in Dell — its cost basis in the stock is above the current offer
price. But it appears the fund has little leverage unless it can persuade
these now doubly cowed public shareholders to play a game of chicken with
Mr. Dell.
At this point, it is simply speculation whether
there could have been a healthy bidding war for Dell. Yet there are lessons
here for companies that use go-shops in the future.
The risk that the process leaves shareholders with
no real choice is particularly keen when management is involved. Dell’s
board went admirably out of its way to secure the cooperation of Mr. Dell
with any winning bidder, but even then it appears that he was not so willing
to cooperate with Blackstone, as Andrew Ross Sorkin of The New York Times
noted in his column.
Running a full auction of a company beforehand when
there is leverage to fully secure management’s cooperation appears to be the
better course.
In other words, the next time a company says that
the price being paid to shareholders will be a good one because they have a
go-shop, be wary. And as for directors, when executives from a private
equity firm with $51 billion in assets under management comes knocking on
your door, you might not want to turn them away.
Copyright 2013
The New York Times Company |
