The tortuous Dell buyout is essentially over after shareholders approved the company’s purchase by its chief executive, Michael S. Dell, and the private equity firm Silver Lake. Now it’s time to step back, be introspective and draw some lessons.
Procedure is only that. The Dell buyout was a model of procedural protections for shareholders. The board must be given credit for negotiating all of them. Yet, as I wrote when I first reviewed these procedures, my thought was that “if a runner is the only person in a race and runs really hard, can there still a winner?†What I was referring to was that Dell had negotiated everything in terms of deal protections. But the board may have negotiated these procedures because it could be safe in doing so knowing that a competing bid was unlikely, a fact later confirmed. The somewhat hollow nature of these procedures was confirmed when the Dell board changed the voting rules to make passage of the buyout easier. While these procedures are important, they don’t mean very much if competing bidders don’t emerge or shareholders can’t use them effectiely. Meanwhile, it is clear that the use of these procedures was an effective way for Dell to halt Carl Icahn’s litigation in its tracks. The Dell buyout shows that good procedure may be more about protecting a company from litigation than empowering shareholders. And don’t expect any bidder to agree ever again to the voting rules originally adopted by Dell, which counted votes not cast as “no†votes.
The initial bidding matters. If fault was to be found with the Dell board, it was in limiting the initial bidding to two private equity firms: the Texas Pacific Group and Silver Lake. When Blackstone inquired in the middle of the process whether it could join the bidding, it was told no and to wait for a deal announcement. Yet by that time, Dell’s business had deteriorated further and Blackstone, after some due diligence, declined to bid. The lesson here is that the initial design of the sale process matters. Dell’s failure to include Blackstone may have locked out a competing bid and cost Dell shareholders. And while boards are understandably sometimes hesitant to open up a full auction process because of the disruption it causes, in circumstances like this where the company is almost certainly to be sold, it appears to be perhaps the better course.In any event, the decisions made at the beginning about potential buyers and when they can bid can be critical.
Institutional shareholders don’t like risk. The bottom line in this deal was that Dell is a melting ice cube with its core personal computer business in decline. Institutional shareholders are in the business of beating the market by a few points, not taking significant risk. With money on the table and the long term risk in Dell, institutional shareholders were always likely to just take the money. That is what these shareholders did, waiting for a small bump but then proceeding ahead to take up the transaction. This is a big issue in markets today and is likely to drive future deal-making as executives realize that shareholders may just not be capable of saying no under these circumstances.
Shareholder activism pays. Let’s face it, $70 million for Mr. Icahn is not a huge payout, but it is a very nice return for six months’ work. While Mr. Icahn is a unique force, merger activism, either fighting a deal or arguing for an increase in price, is going to persist and increase in the markets. But the dynamics of merger activism also drive shareholders toward a deal. The only issue becomes price. So, expect merger agreements these days to be negotiated not only with a mind toward competing bidders but how the parties can fend off these types of activists regardless of whether it helps shareholders.
The Deal Machine must be fed. Once a deal is announced, it takes on its own dynamic. The parties to the deal lock into it psychologically. Meanwhile, the advisers want to be paid, something that often takes place only if the deal does. The market psychology also begins to work to push forward the deal as shareholders, employees and other parties expect it to happen. The question then becomes not whether the deal will happen or not, but under what terms. And as Dell showed, a company has substantial tools in its arsenal, like the ability to set a record date and meeting date, to optimally time success. All of this feeds what Dennis Berman has called the Deal Machine. It is hard to stop or say no to it.
Appraisal is not a panacea. There was much talk about seeking an appraisal action in this deal. Yet appraisal is costly. Shareholders must pay their own legal fees, wait years to be paid and then could end up getting less than they sought. While studies were trumpeted that appraisal in Delaware more often than not finds shareholders getting more, the past is not always the future. In particular, it is unclear what would happen if Dell’s shareholders sought appraisal en masse. In Dell’s case, a judge praised the process used by Dell’s board and appeared skeptical that a higher price could be obtained. In addition, he price of shares in an appraisal proceeding is assessed at the time the buyout closes, not when it is announced, and Dell’s business has deteriorated since then, making it worth less. In any event, even Mr. Icahn has not confirmed he will go through with appraisal, only saying so far that he will seek it. Mr. Icahn has 60 days to try and reach a deal with Dell before actually seeking appraisal. Dell may actually pay him a few cents a share just to go away, as people are wont to do with him. But there is only one Carl Icahn. It all means that appraisal is not the wholesale remedy many people think it is in this deal or others.
Management buyouts. The Dell deal shows the real perils of management buyouts. In an M.B.O., the board is faced with a choice of selling to management or doing nothing. Too often the board decides that a sale must go through and the only issue is price. This appears to have been the case here. The Dell board must be praised for attempting to prevent Mr. Dell from using his position to gain an unfair advantage, something Mr. Dell amenably went along with. But the question remains: Why can’t management simply run the company and make these gains for shareholders?
