Carl Icahn seems to have a lot of fun. Today he wrote a crazy letter to Dell shareholders that opens this way:
We take this opportunity to respond to rumors regarding the availability of financing for our proposal for a recapitalization at Dell and to address recent statements by Dell that demean the prospects of Dell. We are amazed by these statements by the Dell Board. In what other context would the person tasked with selling a product actually spend their efforts negatively positioning the very product they are trying to sell? Is that how the supposed “go-shop” was conducted? Can you imagine a real estate broker running advertisements warning of termite danger in a house each time a prospective buyer seems interested?
We can talk about the “recent statements by Dell that demean the prospects of Dell” in the footnotes1; up here let’s talk about Icahn’s “respon[se] to rumors regarding the availability of financing for our proposal for a recapitalization at Dell.” He says later in the letter: Read more »
If you’re a director of a public company with a controlling shareholder, and that shareholder wants to buy out the rest of the shares, you have a problem. On the one hand, you have fiduciary responsibilities to your non-controlling shareholders to get them the best possible deal. On the other hand: you have a controlling shareholder! He’s controlling! He has inside knowledge that no outside bidder or shareholder can match. He can do stuff like fire you, or make it impossible for you to sell to a higher bidder, or generally make life unpleasant if you reject his bid. He’s got a distinct advantage in negotiating against you, his employee.
Courts and lawyers try to minimize this problem through arid procedural stuff – lots of disclosure and independent directors and majority-of-the-minority votes and “entire fairness” review – but it’s actually just a real problem. You can read about the pending Dole buyout, where founder/CEO/40% shareholder David Murdock wants to buy back his company at an inglorious 18% premium and is carefully following1 all those arid procedural rules, and ask yourself: who cares? Are shareholders really in the same negotiating position as they would be if they were selling an un-controlled company to an outside bidder? Mehhhhh.
But that’s boring and instead you should read today’s astonishing SEC order stemming from the approach to this problem taken by the board of Revlon, a company that at this point is probably more famous for making merger law than cosmetics.2 In 2009, Revlon’s 61% shareholder, Ron Perelman vehicle MacAndrews & Forbes, wanted to buy out the rest of Revlon in a moderately convoluted way.3 So M&F and Revlon negotiated a merger, but that ran aground when Revlon’s M&A banker, Barclays Capital, told Revlon that its fairness committee had said no dice: Read more »
One of my favorite themes in the Dell LBO pseudo-battle is the cognitive dissonance between Dell’s need to tell its shareholders how screwed it is, for the purpose of convincing them to vote to sell at the somewhat underwhelming price of $13.65, and its need to simultaneously tell everyone how good it is, for most other purposes. Like, just, self-esteem for one thing, but also things like getting financing and avoiding a MAC1 and not making prior performance statements sound like lies. Today Ronald Barusch has a delightful Dealpolitik column pointing out another important purpose, which is: paying management a lot for their excellent performance:
Last week Dell Inc. filed its annual compensation committee report. … There were raises for all of the top executives other than Mr. Dell, the chief executive. And everyone was granted bonuses. …
Each of the top officers was ranked at 100%, from a range that can vary from 0-187.5%, in terms of their individual performance. 100% indicates that individuals meet specified objectives, including those relating to “Strategic and transformational objectives relating to each executive officer’s function or business unit, including the degree to which the executive officer is driving change in support of Dell’s transformation.” The objectives are set so that “The Committee believes that the achievement of these performance objectives would correspond to meaningful improvements for the organization and are reasonably difficult to attain.”
Company performance is considered as well and this percentage was set at 70%, from a range that can vary from 0-150%.
Consider the transition of those pseudo-numbers: 100% performance by executives translates into 70% performance by the company translates into, um, this: Read more »
Man, the resistance to this Dell deal is crumbling pretty fast isn’t it? Blackstone dropped its bid two weeks ago, Icahn and Southeastern have been relatively quiet since Icahn defended his right to a free exchange of ideas just before Blackstone dropped out, and the stock is at $13.33, ~2% below the $13.65 deal price, after being as high as $14.51 in the hopes of a better deal.
Dell filed its revised merger proxy today, with revisions presumably mostly driven by the SEC’s comments on its first draft from March. It doesn’t look like the SEC put up much resistance either; here’s a crappy redline and the changes are smallish. Here’s my favorite piece of SEC nitpicking:
Get it? That’s: Read more »
I learned a new word, or word-like sequence of letters, reading the Dell merger proxy this weekend. The word is “must-believe,” and it’s a noun meaning a thing you must believe in order to embark on a certain course of action. You don’t have to believe a must-believe, but if you don’t believe it you shouldn’t do the thing that it’s a must-believe for. There are no prizes for guessing that I learned it from a management consulting deck.1
What are the must-believes for selling Dell to its CEO, Michael Dell, and his private equity sponsors at Silver Lake? Well, here is a must-not-believe, from JPMorgan’s fairness presentation to Dell’s board:2
The dotted box on your right floats rather far above the red line of Silver Lake’s offer: if you’re the board, and you are deciding to sell Dell to Silver Lake for $13.65 a share, you must not believe that Dell’s management is telling you the truth about its projections or that it is competent to achieve them. Because even at the low end of those projections (from September 21, 2012), Dell is worth at least $15.50 a share. Read more »
Two ideas at the heart of modern financial economics are the efficient markets hypothesis, which says that investing doesn’t work, and the Modigliani-Miller theorem, which says that corporate finance doesn’t work.1 Also there is a financial industry which is pretty much organized around ignoring those ideas. Hahaha how stupid of David Einhorn to think that he could make Apple more valuable just by issuing some preferred stock! But also how stupid of David Einhorn to think he should invest in Apple rather than a market-cap weighted index of all the companies! I mean, stock picking, so last century, just index.
Management buyouts are one place where those two efficiency hypotheses break down in obvious ways. Of course management knows more about a company’s prospects than public shareholders do, and so will be able to buy when the company is undervalued.2 And of course adding giant gobs of debt to the balance sheet, with the attendant tax benefits, will make the stock more valuable. This doesn’t always work out – managements have their own problems estimating their company’s prospects, and leverage is risky – but it’s a perfectly plausible theory.
Or so I think but I come from a corporate finance background. Neil Irwin is an economics guy so he is puzzled: Read more »
If you own stock in a company that announces it’s being acquired, and you think the acquisition price undervalues the company, there are three things you can do about it: you can vote down the deal, you can find or propose an alternate deal, or you can sue. No I’m kidding of course you can’t do any of those things: you don’t have enough shares to vote down anything, you don’t have the money to propose something else, and you aren’t a plaintiff’s lawyer (are you?) so you aren’t in the business of suing companies, which turns out to be the sort of specialized skill you can’t just acquire in a fit of pique. Those are the tools, but they can only be wielded by specific people.
Steven Davidoff has a delightful piece in DealBook today about the state of the M&A lawsuit market and it is sobering reading:
[L]ast year, 92 percent of all transactions with a value greater than $100 million experienced litigation. The average deal brought five different lawsuits. In addition, half of all transactions experienced multi-jurisdictional litigation, typically litigation in Delaware and another state.
Left out of that description is what percentage of last year’s mergers were agreed to by lazy corrupt self-dealing boards of directors who were putting their own interests above those of shareholders. I submit that it’s strictly between 0 and 92%.
Take the recently announced buyout of Dell. There are already 21 lawsuits pending in Delaware Court of Chancery, and three more pending in Texas state court.
Meanwhile, in another part of town, someone else thinks that the Dell buyout is bullshit, and is actually doing something about it. Davidoff goes on: Read more »
My thinking on Carl Icahn changes day to day but my current model is that he is a man who after a long and successful career in money management retired in March of 2011 to spend more time on his hobbies. And that his hobbies are irritating Bill Ackman, hijacking public company M&A deals, and threatening his foes with “years of litigation.”1 I’ve got nothing against Bill Ackman, but otherwise that sounds like my dream retirement too.
We talked about Icahn’s Dell stake a little yesterday; I predicted that today Ackman would announce that Dell is a pyramid scheme, and I will award myself partial credit insofar as today a well-known short seller did come out calling Dell a bad and plummeting-cash-flow company, though not quite a pyramid scheme. But as for Icahn’s plans I’m still a bit lost, though his letter to Dell’s board has now been made public. This is the core proposal: Read more »
In a Black-Scholes world you wouldn’t have long tedious arguments about whether an LBO represents a good deal for shareholders. You think Dell is undervalued at $13.65 a share? Hey that’s super. Pay $13.66 for 51% of the shares and vote the deal down.1 The end. There’s a certain class of debates that can be reduced to just making a market and putting your money on it, and that class is probably much larger than the class of debates that actually get resolved that way.
But LBO value disputes mostly aren’t in it, because in real life the financing and friction-cost and legal and other obstacles to accumulating 51% of a big public company are daunting. Southeastern Asset Management, which thinks $13.65 is an insulting lowball offer for Dell, has awkwardly been selling shares for less. We mostly don’t live in a Black-Scholes world. But maybe Carl Icahn does? That is one hypothesis. Another is that Carl Icahn reads the paper every day and is like “oh, a situation is in the news, let me come in and fuck about with it for a while.” Tomorrow we’ll read he’s accumulated an 8% stake in the sequester.
Anyway: Read more »
The new hotness appears to be large cash-rich companies directly providing subordinated financing for big LBOs. Microsoft bound itself to Dell via sub debt in its LBO, and now Warren Buffett’s Berkshire Hathaway is doing a very odd LBO of H.J. Heinz with Brazilian private equity firm 3G Capital. Heinz’s announcement of the merger is brief and dull, but Buffett has filed his commitment letter and disclosed that he will “invest $12.12 billion to acquire a package of equity securities consisting of preferred and common stock and warrants issued by Holding. The preferred stock will have a liquidation preference of $8 billion, will pay or accrue a 9% dividend, and will be redeemable at the request of Holding or Berkshire in certain circumstances.” So he’s providing $4bn of common equity and $8bn of preferred leverage. The remaining $11-ish billion of the $23-ish billion purchase price will come from 3G (equity) and from a JPM/WFC-led debt financing.
There’s a basic tactical explanation for the structure, which is that it solves for this equation:
- Berkshire is an unlevered1 equity investor,
- 3G is an LBO shop,
- it’s 3G’s deal – they sourced it, they’ll operate it, they did the press conference – so 3G needs to own more than 50% of the equity,2
- but they’re not gonna put up, like, $12 billion in equity.
Read more »
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? Read more »