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.2 Read more »
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:
Classically, the “Background of the Merger” section of a merger proxy is where you get the fun details of how the deal came to be, from which you can perhaps extract a sense of whether or not the deal is a good one for shareholders. But it’s written by lawyers so sometimes their idea of “fun details” differs from yours and mine. Here is a critical moment a week before Heinz agreed to be bought by 3G and Berkshire Hathaway, from Heinz’s merger proxy:
On February 8, 2013, representatives of Davis Polk and Kirkland & Ellis had a conference call to continue negotiations concerning the merger agreement. During the call, Kirkland & Ellis noted that the Investors were willing to accede to Heinz’s request that Heinz be permitted to pay regular quarterly dividends prior to closing of the Merger. Kirkland & Ellis noted that, while Heinz had reserved comment on the remedies for a debt financing failure proposed by Kirkland & Ellis in the initial draft of the merger agreement, the Investors’ willingness to enter into a transaction was conditioned on Heinz’s remedies in those circumstances being limited to receipt of a reverse termination fee. Kirkland & Ellis noted, however, that the Investors would withdraw their initial proposal that Heinz would not be entitled to any remedies if the merger were not consummated due to a failure of the debt financing that resulted from a bankruptcy of those financing sources. In addition, Kirkland & Ellis stated that they expected that the Investors would be willing by their guarantees to guarantee liabilities of Parent and Merger Sub under the merger agreement (including liabilities for breach of the merger agreement) up to a cap on liability equal to the reverse termination fee if it became payable (as the Investors had previously proposed). Kirkland & Ellis also reiterated that the Investors were unwilling to agree to a “go-shop” provision but confirmed that they were willing to accept a customary “no-shop” provision with a fiduciary out, which would allow the Heinz Board, subject to certain conditions, to accept a superior offer made following the announcement of the merger agreement. Davis Polk replied with a slanderous description of Kirkland’s mother’s sexual proclivities. Davis Polk suggested that, in lieu of a “go-shop” provision, Heinz might consider a two-tiered termination fee, with a lower fee payable by Heinz if it terminated the merger agreement to enter into an alternative transaction within a limited period of time post-signing. Kirkland & Ellis responded that, while the Investors might have some flexibility on the size of the termination fee, the Investors would not accept a two-tiered fee. Finally, Kirkland & Ellis noted that the standard for efforts to obtain antitrust approvals proposed in the most recent draft of the merger agreement was too onerous in light of the circumstances, but that the Investors would agree not to acquire other food manufacturers during the period prior to closing of the merger if doing so would interfere with obtaining antitrust approvals.
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: Read more »