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The Shareholder Forumtm

special project of the public interest program for

Fair Investor Access

Supporting investor interests in

appraisal rights for intrinsic value realization

in the buyout of

Dell Inc.

For related issues, see programs for

Appraisal Rights Investments

Fair Investor Access

Project Status

Forum participants were encouraged to consider appraisal rights in June 2013 as a means of realizing the same long term intrinsic value that the company's founder and private equity partner sought in an opportunistic market-priced buyout, and legal research of court valuation standards was commissioned to support the required investment decisions.

The buyout transaction became effective on October 28, 2013 at an offer price of $13.75 per share, and the appraisal case was initiated on October 29, 2013, by the Forum's representative petitioner, Cavan Partners, LP. The Delaware Chancery Court issued its decision on May 31, 2016, establishing the intrinsic fair value of Dell shares at the effective date as $17.62 per share, approximately 28.1% more than the offer price, with definitive legal explanations confirming the foundations of Shareholder Forum support for appraisal rights.

Each of the Dell shareholders who chose to rely upon the Forum's support satisfied the procedural requirements to be eligible for payment of the $17.62 fair value, plus interest on that amount compounding since the effective date at 5% above the Federal Reserve discount rate.

Note: On December 14, 2017, the Delaware Supreme Court reversed and remanded the decision above, encouraging reliance upon market pricing of the transaction as a determination of "fair value." The Forum accordingly reported that it would resume support of marketplace processes instead of judicial appraisal for the realization of intrinsic value in opportunistically priced but carefully negotiated buyouts.


 

 

 

A subsequent version of the article below, which had been distributed to Forum participants shortly after initial publication, and a related video were published in the main website of the Wall Street Journal and in the next day's print edition.

 

Source: The Wall Street Journal MoneyBeat, July 15, 2013 commentary

THE WALL STREET JOURNAL    MARKETS & FINANCE


3:48 pm
Jul 15, 2013

Current Accounts

Private-Equity Buyouts Shortchange Shareholders


 

– Bloomerg News

Farewell, then DELL. After a quarter century of service, the stock ticker for Dell Inc. is likely to be consigned to the dust bin of history this week. On Thursday, to be precise, shareholders are expected to seal the sale of the computer company to the private-equity firm Silver Lake Partners and founder Michael Dell.

 

The soon-to-be owners argue—and shareholder advisory firms agree—that this is for the best. That turning around a struggling personal computer maker simply can’t be done in the public markets. That the tyranny of quarterly earnings, fickle share prices and what-have-you-done-for-me-lately investors is too hard to endure.

Mr. Dell summarized his reasoning last month. “As a public company,” he wrote in an investor presentation, “we must take a more cautious approach to our transformation, because we must consider how our stock price will react to the steps we take and what effect that will have on the company and on customers and employees.”

It is a tried-and-trusted argument that corporate restructurings can be carried out much more easily away from the prying eyes of the market.

Is that true? Or are public shareholders selling too soon, leaving money on the table for private-equity groups and corporate management?

Edward Garden, chief investment officer of the activist investing firm Trian Fund Management LP, thinks it is the latter.

Mr. Garden, who co-founded Trian with Nelson Peltz and Peter May, told me that the idea that private equity knows best “has led to a huge transfer of wealth from public shareholders to private shareholders.” In his view, fund managers have finally realized that and are pushing back. “There has been a sea change in the mind of public shareholders,” he said.

Mr. Garden’s perception may be colored by the fact that activists often compete with private-equity firms on deals. But his points strike at the heart of the debate over the merits of being a public company.

The argument in favor of buyouts of ailing companies is based on the twin premise that stockholders can’t stomach the share-price and earnings volatility caused by turnaround plans, and that having a handful of highly focused owners is more conducive to radical change than a diffuse band of holders.

The first assumption runs counter to the mantra chanted by pension funds, mutual funds and even some hedge funds: “We are long-term investors.”

If that is the case, then shareholders ought to be more willing to forgo short-term gains in order to reap the benefit of big corporate changes.

Those fund managers who believed in the turnarounds of, say Apple Inc. and International Business Machines Corp. in the mid-1990s, are probably reading this from a very large mansion.

Bill Riegel, who oversees $214 billion as the head of global equity at TIAA-CREF, believes shareholders can, and should, look at the long term. “I wholeheartedly disagree that restructurings can only be done in private,” he said. “This is how I built my career. I am a value guy and that’s what value guys live for,” he said, referring to the investment strategy of seeking undervalued companies.

It helps that, in Mr. Riegel’s case, he is assessed and compensated over a five-year time frame and not quarterly, as are colleagues at some rival firms.

But given the noise big funds make about their patience, the onus should be on them to push for and support turnaround plans that create long-term value for their companies, rather than taking the private-equity money and running.

There is little evidence of a sea change. The first six months of 2013 were the best half-year for U.S. buyouts since 2007, according to Dealogic.

There is even less debate on the management. I haven’t found a single executive who thinks that being in the public markets is preferable to being behind the private-equity veil.

Not even Robert Nardelli, whose career spanned public markets (General Electric Co. and Home Depot Inc.) and private ones (Chrysler Group LLC and other senior roles at Cerberus Capital Management LP). “We were able to get quick yeses, quick nos and no slow maybes,” Mr. Nardelli said of his time at the Cerberus-owned Chrysler. (Chrysler ended up in Chapter 11 in 2009, but that is another story).

Mr. Nardelli, who now runs his own investment firm XLR-8, recalled that, shortly after Cerberus bought Chrysler in 2007, the car maker raised about $1 billion by selling noncore assets. The divestments bolstered its finances but hurt earnings in the short-term, something the public markets would have hated.

Dell is following a similar playbook now. Its shareholders, and those in future private-equity targets, should be concerned that they are being picked off by smart financiers and knowledgeable insiders. And then do something about it.

– Additional reporting by David Benoit

Francesco Guerrera is The Wall Street Journal’s financial editor. Write to him at currentaccount@wsj.com and follow him on Twitter: @guerreraf72.

 

Copyright ©2013 Dow Jones & Company, Inc. All Rights Reserved

 

 

 

This project was conducted as part of the Shareholder Forum's public interest  program for "Fair Investor Access," which is open free of charge to anyone concerned with investor interests in the development of marketplace standards for expanded access to information for securities valuation and shareholder voting decisions. As stated in the posted Conditions of Participation, the Forum's purpose is to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant is expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

The management of Dell Inc. declined the Forum's invitation to provide leadership of this project, but was encouraged to collaborate in its progress to assure cost-efficient, timely delivery of information relevant to investor decisions. As the project evolved, those information requirements were ultimately satisfied in the context of an appraisal proceeding.

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