This is a tale of two management-led buyouts.
The first is the headline-grabbing $24.4 billion bid by Michael S. Dell and the private equity firm Silver Lake Partners to buy the personal computer maker that Mr. Dell founded. The second is the lesser-known $612 million buyout by the Weiss family of the American Greetings Corporation, the greeting card company they control.
Both deals illustrate the rising tide of shareholder power, as well as the devilish issues that emerge when management tries to buy a public company. And even though Dell’s board has changed the voting rules, both companies are being tested by shareholders who view the buyouts as undervaluing their companies.
At first glance, American Greetings, founded in 1906 by a Polish immigrant, may seem very different from Dell. The company, which owns the Strawberry Shortcake and Care Bears characters, is still controlled by its founding family and is the No. 2 paper card maker, after Hallmark. The Weiss family owns only 7.8 percent of American Greetings, but the family maintains high voting shares that give it 43 percent of the vote â€" a stake worth about $44 million. Through the magic of Wall Street, the Weiss family will take on debt and turn that $44 million stake into full ownership of the $650 million company.
It’s here where the deals start to look more alike.
Last September, the Weiss family offered to buy the company for $17.18 a share. American Greetings, like Dell, is what Wall Street analysts charitably call a melting ice cube, with a disappearing business. In Dell’s case, its PC manufacturing business is losing ground to tablets. As for American Greetings cards, electronic messages are eating away at the paper card business. American Greetings’ stock traded at a high of $53.75 in 1998, but in the last eight years, the company has had almost zero revenue growth. American Greetings’ stock was trading around $14 when the Weisses offered to buy the company.
What happened next also parallels the Dell case. Faced with a proposal by management to buy the company, the American Greetings board established a special committee of independent directors. By all accounts, the independent directors then proceeded to negotiate vigorously over the price. Once the Weisses lined up necessary financing from the Koch brothers (yes, those Koch brothers), the special committee’s demands for more than $20 a share kicked in. The Weisses resisted, and in March a deal was announced at $18.20 after the special committee compromised, saying no deal would be struck below $18 a share and the Weisses stated that they would pay “no more.†Although $18.20 was below the price the board first demanded, the Weisses still raised the offer twice before a deal was reached.
But as in the case of Dell, the announcement set off shareholder outrage. TowerView, the investment company headed by Daniel Tisch and owner of 6.2 percent of the company, has led the charge. TowerView appeared on the scene in October and has claimed that American Greetings was being bought just as its business was turning around, and that if it remained independent, American Greetings’ share price could rise above $21 to trade with what TowerView considered as the company’s peers.
In the wake of TowerView’s complaints, the Weiss family has been forced to raise the price to $19 a share, a 32.5 percent premium over the price before the first offer was announced. It may still not be enough. The proxy advisory service Glass Lewis, which recommended in favor of the Dell deal, has recommended against this transaction. Yet its bigger rival, Institutional Shareholder Services, has recommended in favor of the American Greetings transaction, largely for the same reasons it supported the Dell deal. In a note to its clients, I.S.S. stated that the “value certainty†of the American Greetings deal against the “negative secular trend in the industry†warranted a yes vote. In other words, I.S.S. is saying that this is indeed a melting ice cube and shareholders should not take the risk. Let the Weiss family do it.
American Greetings shareholders will vote on Wednesday. It will be a nail-biter. The main reason is the protections the special committee imposed. Like Dell, American Greetings has what is called a majority of the minority voting condition â€" in other words, it requires that a majority of shares unaffiliated with the Weisses’ vote for the deal for it to be approved.
But the American Greetings board, unlike Dell’s, has not fiddled with the condition to make the buyout easier to pass. In the American Greetings case, the majority of the unaffiliated must vote yes and abstentions and those shareholders who don’t vote count as no votes. The Dell board changed a similar rule last week to say that only shareholders who actually vote at the meeting are counted for purposes of the condition. This excludes nonvoting shares and will make it easier for the Dell buyout.
To be fair, the change in voting rules at Dell was supported by an offer of more money, and you could hardly blame the Dell board, because it also liked the lower offer. But the change appeared to put the board in conflict with its own shareholders, who are more than willing to push back.
In years past, shareholder power was a hollow one. Less than 1 percent of deals have been rejected by shareholders.
American Greetings will be the first test of this new shareholder attitude. Institutional shareholders like mutual funds own 76.44 percent of American Greetings, compared with 55 percent for Dell, according to Standard & Poor’s Capital IQ research. Will it be that these institutions finally step up and take the risk of running a business?
The American Greetings decision is in some ways harder for shareholders. Both the Weiss family and Mr. Dell are unlikely to desert their companies. But American Greetings is a smaller company without Dell’s billions in cash and therefore has less room to maneuver.
When these two deals were negotiated, it is likely that no one thought each would hinge on the condition of requiring a majority of the minority shareholder voting.
Still, management-led buyouts with these conditions have higher premiums even though management still benefits when it uses its power to initiate a deal, one study has found. And clearly, this condition is making the difference.
Even so, for far too long, management-led buyouts often read like scripts with definite outcomes. Boards go through all the right motions and assure shareholders that everything is all right. But the process has a Potemkin village quality about it, as inevitably a deal is reached with management. Indeed, Dell’s shift of the rules makes it appear to want to empower shareholders, but only so much as it allows for Mr. Dell’s deal to go through.
In both the Dell and American Greetings deals, we are seeing something quite rare: shareholders actually exercising their given power.
Yet if they succeed, the question becomes whether Dell’s or American Greeting’s shareholders will become the proverbial dog who caught the car, wondering what to do next.
