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Dell Board Suggests That Shareholders Not Get Too Attached To Dell

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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.

Or you could very reasonably take the view that intelligent objective outside observers really did look at Dell's strategic position and gulp, but the guy whose name is on the door is overly optimistic and is willing to overpay for prospects that those observers found sort of dim. Maybe McKinsey (or whoever) are right, and it's time for public shareholders to pass this dog to people - Michael Dell, Microsoft - who are emotionally invested in keeping it alive. And Silver Lake. Harder to see them as dummies but who knows.

What's awkward for Dell is that it sort of has to promote both views. It seems increasingly likely that the largest LBO since, um, TXU will face a protracted fight to get the necessary shareholder approval - which, per the merger agreement, is 50% of all non-Dell-held shares. At the same time, more or less, it will be selling $13.8bn of bank and bonds to finance the deal.2 The merger proxy will sing a tune of declining strategic positions and passing business risks to the buyout group. The debt prospectus will say "our strategic position is great" and "what risk?"

This tension is of course always there in an LBO - you always have to convince shareholders that you're overpaying and bond buyers that you're underpaying - but normally it's solved with a bigger premium and more enthusiastic/deal-happy shareholder base so that you can spend your time talking the company up to bond buyers rather than talking it down to shareholders. The fact that right now stocks look rather cheap, while bonds look rather expensive,3 doesn't help resolve the awkwardness in Dell's case either.4 Nor I suppose does the label "largest LBO since TXU," since, y'know, look how that turned out.

Dell Schedule 14A [EDGAR]
Dell Defends Deal: ‘Offers an Attractive and Immediate Premium’ [Deal Journal]
Southeastern Asset Management to Fight Dell’s Takeover [DealBook]
Why Southeastern’s Opposition Is a Bigger Hurdle for Dell [Deal Journal]

1.Or whoever, I mean. McKinsey is like "Kleenex"; if it's a non-McKinsey consultant I don't want to know.

2.Random thought: the merger agreement (section 5.12(f)) requires Dell to cooperate reasonably to get the financing done, by preparing financials, going to roadshow meetings, etc. It doesn't require them to say "Dell is great" at those meetings, for obvious reasons. If for some reason you were Dell and wanted to get out of the deal - say you've changed your mind about its value - could you just go to those meetings and be like "yeah, I just don't know about this company"? Like, you'd probably be complying with your covenants, but if you were dour enough maybe the buyers would fail to get financing, the deal would fall through, and they'd owe you a breakup fee rather than the reverse? Meh.

3.Somewhat tendentious characterization of this chart:

4.In Dell's specific case I found these graphs sort of interesting. Here is Dell's stock:

And here is one of its bonds:

So pre-deal the stock was as low as it'd been in ten years except for a brief period at the depths of the financial crisis, while the bonds were like 100+bps tighter than the ten-year average. On dumb historical evidence, now is a particularly terrible time to be selling Dell stock or buying Dell bonds.