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 »
I feel like it would be a useful, or at least entertaining, exercise to require every company, once a year or so, to give a presentation to its shareholders that is like “here’s why you should vote for an LBO of our company at a ~2% premium to the current stock price.” Even if there’s not an LBO in the offing, I mean; just as rhetorical practice. Like Buffett’s tame bear. Anyway Dell, which does have an LBO in the offing, filed its presentation today and it’s 39 pages of “boy do we suck”:
High fives all around, boys! Or take this slide:1 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 »
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 »
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 »
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 »
Today Southeastern Asset Management, which is Dell’s biggest shareholder that doesn’t share a name with it, expressed its displeasure with the company’s $13.65-a-share LBO today in the form of a letter to the board patiently explaining that:
- Dell is worth $23.72 a share, and
- Dell could pay $11.86 a share in cash in the form of a special dividend and still be a decent standalone company with over $1.14 of FCF per share, and
- Can’t we work something out?
Southeastern appears to have a basis in Dell north of $20, so, y’know, they would say that Dell is worth more than $13.65.1 But: who cares? Southeastern gets a vote like everyone else does; the merger agreement requires a majority of the non-Michael-Dell shareholders to approve the deal but preliminary nose-counting suggests that, between index funds and merger arbs and others not anchored in the $20s, they’ll probably get there.
What is Southeastern up to? Their proposed dividend-recap solution, in which a standalone Dell would increase its shareholder value through the magic of financial engineering, may or may not work,2 but that’s mostly irrelevant: it’s hard to imagine the board changing its mind now and deciding that standalone engineering is superior to this LBO. For one thing: that is the sort of thing that boards obviously consider before agreeing to an LBO, so presumably they had a reason for rejecting it. For another: if Dell decides now, as opposed to last week, that a dividend recap is the way to go, it’ll owe Silver Lake $450mm in termination fees. That’s the sort of expensive change of heart that makes a board look really bad – and that alone is reason enough to be pretty sure that idea will never fly.
Which is not to say Southeastern doesn’t score some good points. I was moved by this: 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 »
If you were Microsoft and the sponsors of an LBO came to you and said, “we have about $17bn in debt to place, do you want $2bn of it,” would you say yes? Let’s say you’d say yes: would you demand a higher or lower interest rate for it than everyone else?
The Dell deal is pretty new and soon we’ll have a Background of the Merger to chew over – and, y’know, actual deal docs – but for now the most informative reporting seems to be this Journal story and it’s … sort of odd. Here is Microsoft’s involvement:
Between Silver Lake and Mr. Dell, the buyout group felt it could arrange for cash and loans on its own. The choice was between taking on $2 billion more in high-yield debt or bringing in Microsoft as a “passive debt investor” who would get no board seats or governance rights, but would be “emotionally and financially committed” to Dell’s future, a person said. Microsoft and Dell already are partners, but the $2 billion debt was aimed at creating a closer partnership between the two within an existing commercial agreement, the person and others said. Microsoft’s $2 billion note is a multi-year instrument with an attractive interest rate, one of the people said.
I don’t know what any of those words mean! The concept of Microsoft being “emotionally committed” to anything particularly boggles me. (It may have something to do with supporting “the long term success of the entire PC ecosystem” without ticking off other manufacturers by taking an equity stake in Dell.)
Also, I don’t know what “attractive interest rate” means. Read more »