Dell loses appraisal case

It will now have to pay up millions of dollars to investors who opposed the merger, including Carl Icahn.

In a ruling that could have a significant impact on Dell, a Delaware judge has ruled that Silver Lake Partners and Michael Dell have under-priced their 2013 $24.9 billion buyout of Dell Inc by nearly 22%. They could now be forced to pay tens of millions of dollars to investors who had opposed the deal.

This ruling, which has implications for nearly 5.5 million Dell shares, is a major victory for specialised hedge funds which have increasingly capitalised on a type of lawsuit, which in legal terms is known as an appraisal.

This lawsuit will allow investors who had opposed the bitterly contested Dell buyout to sue and ask the Delaware judge to determine a fair deal price.

Earlier, activist investor Carl Icahn had urged Dell shareholders to vote down the deal and take their case for fair value to court.  The initial appraisal value was sought for around 40 million shares, however the bulk of these shares were removed for procedural reasons.

Vice Chancellor Travis Laster has ruled that the fair value of Dell’s shares were $17.62 and not $13.75.

Investors who sought appraisal will now be in a position to collect $20.84 per share.

While Dell investors presented evidence to show that the fair value of the shares were $28.61 per share, Michael Dell and Silver Lake however contested this and said the fair value was only $12.68, thus saving hundreds of millions of dollars.

As per Laster, Silver Lake and Dell took undue advantage of a dip in the company’s stock price and its board never determined the intrinsic value before negotiating.

“The original merger consideration was dictated by what a financial sponsor could pay and still generate outsized returns,” wrote Laster.

In his ruling much of the judge’s opinion went on to explain why the deal price was not a fair value indicator, particularly in a management-led buyout.

Incidentally, a number of smart hedge funds have strategically swooped in just before a deal closes, at a time when there is the least possible chance of the deal to collapse and buy its stocks for the sole purpose of seeking appraisal.

This strategy is beneficial to the hedge fund since investors who seek appraisals collect 5% points above the federal discount rate as long as the case is pending. They however do not get paid at the deal’s closing.

The U.S. Chamber of Commerce has taken notice of this strategy and has complained that this law is being exploited by a select few, since they can earn a return on their investment even if the deal price is found to be fair.

Significantly, T Rowe Price may be one of the biggest losers from the Dell case as it was one of the few mutual funds managers who tested the appraisal strategy. Dell was able to knock down T Rowe Price’s stock holdings since the mutual fund by mistake voted in favour of the buyout.

T Rowe Price would have collected almost $190 million if its Dell stock had been appraised. In its ruling, the Delaware judge declared that the fund was not entitled to any interest on its shares.

“T Rowe Price runs mutual funds and allocates capital, but they may regret trying to do this themselves. This is just one of the pitfalls with appraisal, and it’s not for novices,” said Minor Myers, a professor at Brooklyn Law School in New York.



Categories: Entrepreneurship, HR & Organization, Regulations & Legal, Strategy

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