Dell reported earnings today and they feel a little pointless, as Dell is no longer particularly an earnings play, unless of course it is. Dan Primack is mad because of the irrelevancy of the exercise:
What Dell did not want to talk about, however, was its pending $28 billion buyout by company CEO Michael Dell and private equity firm Silver Lake Partners. It also chose not to provide guidance for further quarters, or even make Michael Dell available to analysts.
Apparently the company already thinks it’s been taken private. … Dell is asking shareholders to approve a $13.65 per share deal (plus a $0.16 per share dividend) that is being opposed by the company’s two largest outside shareholders. Wouldn’t such shareholders benefit from knowing how the company views its future financial prospects, before casting their ballots?
Ha, sure they would. But they can’t because it’s illegal. Not “illegal” in the sense of “against the law,” but “illegal” in the sense of “if they did it, Dell’s lawyers would have heart attacks and die, and then they’d have no lawyers, and they’d probably go do things that are against the law, so it ends up in the same place.” The thing is:
- Sometimes companies get earnings guidance wrong. Companies like Dell, even. Last year at this time, Dell said that it “expects non-GAAP earnings per share to exceed the record $2.13 it delivered in fiscal 2012 and expects to continue strong execution.” Actual non-GAAP EPS for fiscal 2013 were $1.72. Oops.
- One out of four people in the United States is employed in the industry of suing companies for getting things wrong in earnings reports, financial statements, etc.1
- But! The U.S. has a law – the PSLRA safe harbor for forward-looking statements – that basically makes it hard for plaintiffs’ lawyers to sue companies for getting guidance about future earnings wrong: you have to either sue them for making false statements about past or present facts, or else meet a pretty high bar of showing that the guidance was intentionally false just to get in the door on a lawsuit.
- But! That law does not apply to “going-private transactions” like Dell’s LBO.2
So that is pretty much that. The plaintiffs’ lawyers who are already suing on behalf of Dell shareholders are also the ones – or, I mean, close relatives of the ones – who make it impossible for Dell to tell those shareholders what it thinks about future earnings. If it did disclose an outlook, and that outlook turned out too high (artificially inflating the stock!) or too low (selling it too cheap!), it would get horribly, horribly sued. So no outlook for shareholders: they are left with the board’s vague unease about Dell’s future prospects, but nothing quantifiable. Well done lawyers!
One more thing though.3 There’s a pretty good chance that Dell will release earnings guidance for 2013 and beyond. This will come in connection with its bankers’ fairness opinion disclosure in the merger proxy, probably next month. Because (1) it will need to disclose the fairness opinion and (2) that opinion will, if semi-competent, be based in part on Dell’s earnings projections, Dell will be forced to disclose those projections. But they’ll be projections as of the time the deal was signed early this month, not as of the time of the proxy next month (and certainly not as of the vote later this year), meaning that if Dell’s prospects improve or deteriorate in the interim they’ll be inaccurate – and they won’t be updated. And they’ll be heavily caveated as not “these are our projections” but rather “here are some numbers that our bankers had, we dunno how they got them, they mean nothing, don’t rely on them.”4
So: Dell can’t release current guidance that it stands behind, but it can release stale guidance that it disclaims. Which of course you are free to interpret as Dell’s guidance as you make up your mind about the merger. You just can’t sue over it.
Dell Reports Fourth Quarter, Full Fiscal Year Financial Results [Dell]
Hey Dell, what the hell? [Fortune / Dan Primack]
Dell results underpin buyout offer [FT]
1. NUMBERS APPROXIMATE.
2. Section 27A(b)(1)(E) if you’re following along at home. Here is an informal and a formal definition of “going private.”
3. Maybe two more things. IPOs, like going-private transactions, are not covered by the safe harbor, so companies are very careful about putting guidance in an IPO prospectus. Which is why their underwriters kiiiiiiind of do it for them, via research notes with earnings estimates based on meetings with the company. One thing leads to another and you get the Facebook situation, where Facebook gives informal guidance to analysts, they use it in their initiating reports, Facebook updates that guidance late in the game, only favored clients get the updated numbers, etc. etc. You could imagine Dell being more forthcoming with its outlook in one-on-one meetings to persuade big investors to vote for the deal than it is in its written, public, SEC-filed earnings release.
4. We talked recently about the Getco deal for Knight; here is the analogous disclosure and caveating there:
GETCO does not as a matter of course make public its long-term projections as to future revenues, earnings or other results due to, among other reasons, the uncertainty of the underlying assumptions and estimates. However, GETCO is including this unaudited prospective financial information because it was, among other information, made available to Knight and Sandler O’Neill in connection with their evaluation of the mergers. In addition, certain of the unaudited prospective financial information was also made available to BofA Merrill Lynch in connection with its evaluation of the mergers. The inclusion of this information should not be regarded as an indication that any of KCG, GETCO, BofA Merrill Lynch, Sandler O’Neill, Knight or any other recipient of this information considered, or now considers, it to be predictive of actual future results. GETCO reviews and updates its internal projections regularly and has revised its internal projections included in this joint proxy statement/prospectus since December 2012 based on, among other things, actual experience and business developments. Neither GETCO nor KCG is under any obligation to update prospective financial data included in this joint proxy statement/prospectus and does not intend to do so, other than as required by applicable law.
The unaudited prospective financial information was, in general, prepared solely for internal use and is subjective in many respects and reflects numerous judgments, estimates and assumptions that are inherently uncertain in prospective financial information of any kind. As a result, neither GETCO nor KCG provides any assurance that the prospective results will be realized or that actual results will not be significantly higher or lower than estimated.
It goes on in that vein for a while.