Laster Rules Dell Merger Shortchanged Shareholders

Tom McParland, Delaware Business Court Insider

May 31, 2016
 

Vice Chancellor J. Travis Laster on Tuesday ruled that Michael Dell and the private equity firm Silver Lake underpaid investors by approximately 28 percent in the $24.4 billion going-private merger of Dell Inc. in 2013.

In a 114-page opinion, Laster ruled Silver Lake should have paid $17.62 per share to acquire the computer company, based on a discounted cash flow analysis. Instead, the technology investing firm bought Dell for $13.75 after a back-and-forth sales process in which it twice sweetened the pot for dissenting stockholders.

At the time of the sale, Dell was struggling to compete in the PC market, as internal revenue projections clashed with a depressed stock price and waning expectations for the company Michael Dell started out of his freshman dorm room more than three decades ago.

Only 70 percent of the shares present at a September 2013 merger voted in favor of the deal. Those opposed pursued the high-stakes appraisal action, arguing that Dell's fair value was more than twice the merger price.

Earlier this month, Laster booted approximately 27 million shares held by T. Rowe Price from the proceedings because of a mishap that caused them to be voted in favor of the merger.

T. Rowe Price publicly opposed the deal and said its shares were still eligible to be appraised. But Laster disqualified the shares under Delaware's dissenter requirement, which mandates that investors who wish to seek appraisal vote their shares against a merger.

Based on Laster's decision on Tuesday, T. Rowe Price would have been eligible for a payout of more than $100 million.

In his analysis, Laster described a sales process that was flawed but not malicious. For instance, he said, the chasm between the market's perception of Dell and the company's operative reality and limited competition throughout prevented investors from getting more consideration from their shares.

"The sale process functioned imperfectly as a price discovery tool, both during the pre-signing and post-signing phases," Laster said. "Its structure and result are sufficiently credible to exclude an outlier valuation for the company like the one the petitioners advanced, but sufficient pricing anomalies and disincentives to bid existed to create the possibility that the sale process permitted an undervaluation of several dollars per share."

Were the process to be challenged on the basis of fiduciary duties, it "would sail through if reviewed under enhanced scrutiny," he added.

Only Silver Lake and KKR & Co. submitted pre-signing offers to buy Dell, but KKR dropped out of the running, leaving Silver Lake as the only serious potential buyer. Blackstone Management Partners and billionaire activist investor Carl Icahn each made post-signing bids during a 45-day go-shop period, but both offers failed to materialize.

The outcome deal, on total, did not hold up as the most reliable indicator of Dell's value, Laster said. And while the market data foreclosed the petitioners' argument that the merger undervalued the company by $23 billion, the available information did show that investors were shortchanged, albeit to a lesser degree.

"What the market data does not exclude is an underpricing of a smaller magnitude, given that all of the participants constructed their bids based on a leveraged financing model and were limited by its constraints," he said.

In his review, Laster turned to a discounted cash flow, or DCF, analysis, an approach the Chancery Court favors because it "merits the greatest confidence within the financial community," and he seemed to distance the court from the industry-standard leveraged buyout pricing model for determining fair value.

"The fair value generated by the DCF methodology comports with the evidence regarding the outcome of the sale process," he said.

According to court documents, the bulk of the remaining shares eligible for appraisal belong to hedge fund Magnetar Capital, which stands to gain nearly $15 million for its almost 4 million shares, plus interest accruing from the deal's closing date.

Stuart M. Grant of Grant & Eisenhofer represented the petitioners. He declined to comment on the case.

Gregory P. Williams of Richards, Layton & Finger and a team of attorneys from Alston & Bird's Atlanta and Los Angeles offices represented Dell. Williams did not immediately return calls seeking comment.

The case was captioned In re Appraisal of Dell.

Tom McParland can be contacted at 215-557-2485 or at tmcparland@alm.com.