One way in which my deep personal laziness manifests itself is my fascination with ways of getting paid not to do things.1 Contested M&A deals turn out to be full of such opportunities, from greenmail to don’t-work-for-a-hostile-bidder law-firm retainers. Break-up fees are a favorite of mine, and a place where I really feel mystified by the financial world. I have seen people lose out on a deal to a topping bid, putting them in line for an eight-figure break-up fee, and I have seen the look on their faces and: they were sad. Sad! To get paid tens of millions of dollars to stop working on the deal! I had to keep working on the deal, and no one was giving me millions of dollars.
At some intellectual level I understand this. So, in the Dell deal for instance, Silver Lake want to put $1.4 billion into Dell today and exit in five years and make 5x their money, I get it. But: that’s hard! You have to, like, manage Dell. Seems like a big company, has some problems. Your $1.4 billion is at risk, you have debt covenants to worry about, and, I dunno, wristwatch computers or something to make. Or someone can just write you a check for $450 million and you can not do any of that.2 I mean: go ahead, write me a check for $450 million, and I will happily not manage Dell. 450 dollars, really. Buy me a drink and I will spend as long as you want not running Dell. I’d be at least as good at it as Silver Lake.
On the other hand, if you’re a Dell shareholder, what do you win if you vote down the buyout deal? Like, not much, right? Your reward is that you get to keep your shares of Dell, which I guess were in the $11 ballpark before news of buyout talks were leaked. I’m not sure anything particularly great has happened to Dell in the intervening weeks, other than the buyout offer; you’re left with a previously $11 stock with (1) no valuation boost from the prospect of an MBO in the near future (right? why do this again in a month?), (2) the embarrassment of a broken deal, and (3) 450 million fewer dollars, from the breakup fee. [Update: ha, wait, no, my bad - they don't pay the fee just for a shareholder no-vote.2.5] Plus I suppose an embarrassed board and sulky CEO.3
The recent Dell news is that (1) T. Rowe Price has announced that it plans to vote against the deal and (2) Southeastern, which already eloquently opposed the deal, has hired proxy solicitors to try to round up votes against it4 . Momentum seems to be building for a no vote; between them T. Rowe and Southeastern have some 200mm of the 730mm-ish votes needed to block the deal, and it sounds like others are joining in.
But of course no one wants that. Even T. Rowe didn’t say they’d vote no; what they said was“We believe the proposed buyout does not reflect the value of Dell, and we do not intend to support the offer as put forward.” They’d support, one assumes, a higher deal. Thus this; the deal price is $13.65:
This is not a market assuming a no vote followed by a return to an $11-but-damaged stock; this is a market assuming that T. Rowe, Southeastern, et al. will be able to guilt and threaten at least another, what, fifty cents or so out of Dell’s potential buyers.5
And why not? Here is a nice post by Aswath Damodaran summing up the valuation arguments, and putting Dell more in the $16s than the $13s.6 Initial accounts of the deal negotiation suggested that Silver Lake was stretching to get to $13.65, so $16 seems aspirational, but perhaps there’s room to meet in the middle.
It’s a strange negotiating position, though, isn’t it? Before the deal was signed, Dell’s special committee had some leverage: Silver Lake would get nothing if they walked away, and Dell wouldn’t be all that damaged by the failure of secret talks. After it was signed, though, the shareholders have rather less leverage. They have to go to all of the effort of a proxy fight, and for what? If they win, they lose an above-market deal without an obvious replacement. And Silver Lake gets paid $450 million to not worry about Dell any more. [Update: not really, though Silver Lake does get the fee if the shareholders convince the board not to recommend the deal any more, so that's something.] If it were me, I wouldn’t raise my bid by a penny: why pay $1.4 billion to acquire Dell when I could get paid $450 million not to? I appear to be in the small minority in that opinion, which probably explains why I’d never make it in private equity. Lucky for Dell’s shareholders.
Big Investors Strengthen Opposition to Dell’s Sale [DealBook]
T. Rowe Price says will not support Dell buyout [Reuters]
Michael Dell’s Conflicted Buyout [Aswath Damodaran]
2. I assume that Silver Lake gets only a portion of that; Michael Dell is committing a third of the cash equity, plus like $3bn worth of rolled-over stock, and Microsoft’s $2bn of sub debt, plus the banks’ debt commitments, probably also put them in line for some cash out of a breakup fee. So maybe Silver Lake gets only like $100-200mm. Still call it a 10% return on their $1.4bn over, what, six months of risk? That’s a near-respectable 21% IRR.
2.5. They pay the fee for, among other things, a competing deal, a change in board recommendation, or a shareholder no-vote preceded by a competing proposal and followed by a signed competing deal, but not for a straight no-vote. See section 7.3(a) of the merger agreement.
4. Incidentally it’s gotta hurt Southeastern every time they file a new 13D with an updated Schedule II showing that they keep selling below the deal price. They dumped nearly half a million shares on Friday at $13.49. Not their fault but still a bit of a mixed message.
5. On the other hand casual examination of bond and CDS spreads suggests that they’ve tightened a bit over the past few days, suggesting … what? That credit markets think that the chance of no deal has gone up? That they think there’s a nonzero chance of a less levered deal in which Southeastern etc. roll into stub equity?
6. I was particularly tickled by his spin on Southeastern’s argument that Dell shareholders should be paid more for the amount spent on (supposedly 15%-IRR) acquisitions done over the past few years:
The same management that made those mistakes now wants to buy the company at a lower price that they, in a sense, caused. That looks to me like rewarding management for a job badly done. Furthermore, for the last few years, Michael Dell has been telling stockholders that these were not mistakes (and were making healthy returns). … As I see it, there are two possible fair solutions. One is [to] take the money that Dell has spent over the last five years on acquisitions and investments (an amount in excess of $7 billion), charge a reasonable return (a break even where they delivered just the cost of equity) and add it to the value of the company now. In fact, Southeastern Asset Management, which holds more than 7% of Dell shares and is the second largest stockholder in the company, made exactly this pitch in a letter that they sent to Dell’s board, when they took Michael Dell at his word, capitalized his mistakes and estimated an value of $23.72 per share.
This is a great argument! But, like, for a footnote. Not for actually getting money. Don’t hold your breath for Michael Dell to be all “hey, you’re right, those $7bn acquisitions were on my dime.”