The months of torment in taking Dell private have at last ended. But the lessons will probably go unlearned.
Shareholders have finally approved the $25 billion buyout by the founder, Michael Dell, and the investment firm Silver Lake Partners, after three postponed votes and a measly 2 percent price increase. Overconfidence and delay got the better of both sides â€" and speculators succumbed to their overactive imaginations.
When the buyout was announced in February, its backers were confident that approval wouldn’t be a problem. Yet big shareholders, like Southeastern Asset Management, were convinced that the founder was trying to steal the company. Both sets of beliefs had some foundation. The buyers knew rivals were unlikely to crash the party, as Mr. Dell probably wouldn’t roll his shares into a competing bid, which meant alternate buyers would have to find a lot more equity. And insiders’ knowledge of a company and sway over the board make management buyouts rife with conflicts of interest that can be exploited.
These conflicting perspectives created overconfidence. The deal might have passed on its initial try had the buyers not disregarded the important detail that abstentions counted as “no†votes. Dissidents ignored Dell’s imploding business and nearly torpedoed the deal â€" which would have sent the stock plunging â€" for what in the end was a nominal increase in the takeout price.
The seven-month process damaged the company. Management’s attention was focused elsewhere while tablets continued to chomp into Dell’s person computer business. And the contentious battle hurt Dell’s brand and the willingness of its clients to buy its gear. The board was forced to show how precarious the company’s situation was to justify its acceptance of the bid. So the buyer is getting a dinged company.
Finally, the prolonged battle made monkeys out of outside analysts. They seriously pondered the idea of Carl C. Icahn buying the company via a recapitalization using a technique known as stub equity. In such a deal, the buyout group takes control of a company by buying a majority stake but leaves some portion â€" the stub â€" in shareholders’ hands. That Mr. Icahn rarely succeeds in taking over companies was swept aside, as was the fact his numbers didn’t add up. And stub equity is nearly impossible to structure in any deal because it creates huge conflicts of interest and leaves companies too indebted.
Mr. Dell’s deal may have been a torment for all the participants, but it was of their own creation.
Robert Cyran is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
