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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.


 

Forum reference:

Court decision in Dell valuation confirms Forum participants' views of appraisal rights

 

For the court's careful explanations of the distinction between fairly negotiated pricing and the intrinsic fair value of a company, and of the court's appraisal of that fair value, see

Note: The article below incorrectly reports that the court "split the difference" between the valuations advocated by the opposing "expert" views (here). In fact, as indicated in the following statements (Opinion page 112; PDF p,113), the court was splitting the difference between its own discounted cash flow ("DCF") analyses based on two different forecasts presented by the same expert, Hubbard, representing Dell, after having decided not to place any reliance upon the implausible $28.61 valuation of the expert presented by Grant & Eisenhofer representing the petitioners ("This decision concludes that there are two sets of reliable forecasts for the Company: Hubbard’s adjusted BCG 25% Case, which was likely somewhat conservative, and Hubbard’s adjusted Bank Case, which was likely somewhat optimistic." Opinion page 104; PDF p,105):

6. The Result Of The DCF Valuation

This decision adopts the parties’ agreed upon calculation of 1,765,369,276 fully diluted shares outstanding. Using Hubbard’s adjusted BCG 25% Case, which was likely somewhat conservative, a DCF analysis that incorporates the foregoing inputs generates a fair value per share of $16.43. Using Hubbard’s adjusted Bank Case, which was likely somewhat optimistic, a DCF analysis that incorporates the foregoing inputs generates a fair value per share of $18.81.

Having no reason to prefer one realistic case over the other, this decision weights them equally.

For other news reports of the court's decision in the closely watched appraisal case initiated October 29, 2013, by the Forum's representative petitioner, Cavan Partners, LP. and supported by its attorneys' research of court valuation standards, see the "Appraisal of Fair Value" section of the Dell project's reference page.

 

Source: Law360, May 31, 2016 article


Chancery Values Dell Stock Nearly $4 Above $25B Deal Price


By Matt Chiappardi


Law360, Wilmington (May 31, 2016, 12:04 PM ET) -- A Delaware Chancery judge ruled Tuesday that the fair value of Dell stock at the time of its $25 billion take-private deal was $17.62 per share, nearly $4 higher than the transaction price, but not nearly as high as the $28.61 shareholders who pushed for appraisal were seeking.

In a detailed 115-page opinion, Vice Chancellor J. Travis Laster wrote that while the deal price of $13.75 per share was an important factor in determining the fair value of Dell’s shares, there was enough evidence presented during a four-day appraisal trial in October that suggested there was a “valuation gap” between transaction price and actual intrinsic price.

Part of that evidence included a showing that the original buyout offer led by founder and CEO Michael Dell had considered what a financial backer would be willing to pay and still generate “outsized returns,” as well as the market’s perception of what the company was worth contrasted by its “operative reality,” and the effect of “anchoring” what could be a depressed share value to transaction negotiations, Laster wrote.

“When a company with a depressed market price starts a sale process, the anchoring effect makes the process intuitively more likely to generate an undervalued bid,” the vice chancellor’s opinion states. “Market myopia can accentuate this problem. Investors focused on short-term, quarterly results can excessively discount the value of long-term investments. The record at trial demonstrated that a significant valuation gap, investor myopia, and anchoring were all present in this case.”

Laster states that there was no evidence Michael Dell or his management team tried to create a depressed value and take advantage of it, and said the deal would “sail through” if it were examined as a breach of fiduciary duty case. But the company had a long-term transformational strategy from its reputation of being planted in the shrinking personal computer market — seeking to expand into other areas to compete with the exploding smartphone and tablet space that had eaten into its business — and there was "compelling evidence" of a disconnect between the market’s view of Dell and its intrinsic value, the opinion states.

Shareholders who petitioned for appraisal of their stock, which included heavyweights like T. Rowe Price, had argued the price of Dell
should be even higher, with their experts at trial pegging the actual share-price value at $28.61.

On the Dell side, its expert thought the price should be even lower than the deal consideration, setting it at $12.81, and the vice chancellor essentially took those two opinions, which show a roughly $28 billion valuation gap between them, and split the difference.

“Having no reason to prefer one realistic case over the other, this decision weights them equally,” Laster wrote.

The vice chancellor called the Dell expert’s opinion “conservative,” while he said the petitioners expert was “optimistic,” and averaged out the data where it conflicted to come to a fair value of $17.62.

“This approach has the additional benefit of arriving at a cost-savings number that is closest to management’s best estimate of what the company believed was attainable at the time of the merger,” the opinion states.

Representatives for the sides did not immediately respond to requests for comment Tuesday.

Laster’s decision means that shareholders who petitioned for appraisal are due an extra $3.87 per share, plus interest. Meanwhile, the bulk of the petitioners remain ineligible for any relief unless
an earlier ruling in the case is overturned by the Delaware Supreme Court.

Earlier this month, the vice chancellor ruled that funds run by T. Rowe Price, one of the largest petitioners, was not eligible for appraisal because it technically, through a series of intermediaries, voted in favor of the deal, even though it has steadfastly opposed the merger.

Under Delaware law shareholders are only able to exercise their appraisal rights if they haven’t voted in favor of it or made any public statements in support.

T. Rowe Price
blamed the discrepancy
 on a “computer glitch” and that the court should take its actual desire to oppose the deal into consideration, but Laster ruled that an investor assumes such a risk if it uses intermediaries in its voting practices.

Dell is represented by Gregory P. Williams, John D. Hendershot, Susan M. Hannigan and Andrew J. Peach of Richards Layton & Finger PA and John L. Latham, Susan E. Hurd, Gidon M. Caine and Charles W. Cox of Alston & Bird LLP.

The petitioners are represented by Stuart M. Grant, Michael J. Barry, Christine M. Mackintosh, Jennifer A. Williams and Rebecca A. Musarra of Grant & Eisenhofer PA.

The case is In re: Appraisal of Dell Inc., case number 9322, in the Court of Chancery of the State of Delaware.

--Editing by Rebecca Flanagan.

 


© 2016, Portfolio Media, Inc.

 

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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