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 »
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 »
It’s always a little awkward for a company to issue a statement saying “we’re not really that good a company,” but Dell’s Special Committee did a decent job of it today:
In the course of its deliberations, the Special Committee of Dell’s Board considered an array of strategic alternatives. In addition to working through financial and capital allocation issues with its independent financial advisors, the Committee retained a prominent management consultant to help it assess the Company’s strategic position. Based on that work, the Board concluded that the proposed all-cash transaction is in the best interests of stockholders. The transaction offers an attractive and immediate premium for stockholders and shifts the risks facing the business to the buyer group.
I think that this says that the board hired McKinsey1 to figure out how to improve Dell’s business, and they looked around and said: “It’s hopeless, burn the place down, or take whatever you can get for it.” And they did, agreeing to an LBO led by Michael Dell and Silver Lake at $13.65 a share, which some shareholders find a bit light.
One question you might ask is: who knows Dell’s strategic position better, Michael Dell or McKinsey (or whoever)? I don’t know that there’s an obvious answer. You could very reasonably take the view that Michael Dell, chairman and CEO and founder and namesake of the company, really is stealing it away from shareholders at a low valuation and taking all of the upside for himself and his private equity sponsors. On this view the board has no particular choice but to sell to him – he’s offering a premium and no other buyer is likely to compete with the CEO and founder’s offer – and so has brought in McKinsey to provide litigation-friendly rubber-stamping for that decision. This fits nicely with the notion that management buyouts always sort of screw public shareholders, as well as with the notion that management consulting is always just a highly-credentialed rubber stamp for whatever an executive was planning to do anyway. Read more »
The Dell deal documents are out and they are short of juicy details; we’ll have to wait for the proxy for details on things like just how much of a discount Michael Dell is taking on his shares or what exactly the terms of Microsoft’s loan are. There is, though, the information that that loan will take the form of $2 billion of subordinated debt, and that the total cash equity investments from Silver Lake, Michael Dell and MSD will total $2.25bn. This seems pretty sensible; Microsoft is effectively writing half of the equity check, though for a fixed-but-subordinated return, plus emotional benefits or what have you. And if you’re worried about how easily debt markets will swallow some $3.25bn of bonds, $5.5bn of Term B/C, and billions of assorted other secured financing,1 which with $4bn of existing bonds brings Dell to around 4x total leverage, making $2 billion – almost half a turn – of the debt subordinated, long-term, and emotionally committed can’t hurt.
But for most of the fun stuff we’ll have to look forward to the proxy. And that isn’t good enough for some people. Reuters reports that the first shareholder lawsuit over the deal has already been filed, one day after announcement, which I assume means it was in the works before the deal was announced. This sort of amazed me: Read more »