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:
A good public-relations rule of thumb is that, when you and your nemesis sign an agreement putting aside your differences, you should probably also agree on how you’ll announce your new friendship to the world. What you don’t want to do is, for instance, to sign a standstill agreement with a potential buyer in your strategic process, and announce that standstill agreement one morning, and then a few hours later have the potential buyer put out his own announcement taking issue with your characterization. Another rule of thumb might be, keep Carl Icahn away from your strategic process if at all possible.
This morning Dell sort of blandly announced that Carl Icahn had agreed not to buy more than 10% of Dell’s shares, or enter into agreements with other shareholders that would get him above 15%. And this afternoon Icahn announced that that agreement meant nothing and nobody should give it a second thought: 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 »
Yesterday we talked a little about Dell and its vague desire to escape the short-term obsessions of the public equity market yesterday. Today I came upon this new paper by Harvard Law professor Jesse Fried, about how long-term shareholders are really just as bad as the short-term ones. The argument is:
companies like to talk about favoring long-term shareholders over short-term ones, because
they think (er, say) that short-term shareholders want things (slashing R&D, earnings manipulation) that reduce the overall economic value of the firm, while long-termers only want to grow its value, but
in fact long-term shareholders also want things that reduce the overall economic value of the firm, so
maybe favoring the long-term isn’t as good an idea as people think.
The particular things that long-term shareholders prefer that are value-destructive involve transacting in the company’s stock. On the buyback side, favoring long-term shareholders can mean using money to buy back stock when it’s underpriced, even if spending that money on productive investments would be better for shareholders as a whole. It can also mean manipulating earnings lower to get more profitable buyback opportunities. There is some evidence that these things happen.1
On the issuance side, favoring long-term shareholders means issuing more stock when it’s overpriced, for instance to engage in otherwise value-destructive M&A. Amusingly, Fried’s example of this is AOL Time Warner, famously the worst M&A transaction from the invention of the corporate form until Countrywide; he argues that, despite this value destruction, AOL’s long-term shareholders were enriched by AOL’s purchase of Time Warner.2Read 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.
[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.
There’s a small cause-and-effect mystery in the interaction between share prices and share buybacks. On the one hand, when a company buys back stock, that should make the remaining shares more valuable, on reasoning both fundamental-ish (EPS is up!) and technical-ish (more buyers than sellers!). On the other hand, issuers seem to view their own shares as Veblen goods: the higher the price, the more they want to buy.1 So it’s a little hard to know whether the market is reaching record highs (in part) because companies are spending record amounts of money buying back their stock, or vice versa. The first explanation mostly makes sense, and the second mostly doesn’t, which is a good argument for the second being right.
The first explanation is more popular though. Today the Journal noted that “U.S. companies are showering investors with a record windfall in the form of dividends and share buybacks, helping to propel the stock market’s rally,” and FT Alphaville and others have been talking about de-equitization, as well as the declining attractiveness of listed public equity. So have I, come to think of it.
One possibly relevant question you could ask is: how much is the market shrinking? That seems susceptible to various sorts of answers, as well as various possibly relevant time periods. As it happens, tomorrow marks the four-year anniversary of the market’s hitting a 15-year low, so mazel tov everyone on that. Here’s perhaps a place to start measuring U.S. equity market shrinkage over those four years: