Dell’s buyout underpriced;T Rowe Price’s costly mistake

the Dell leveraged buyout

Three years ago, Michael Dell decided to take the company he founded private in a leveraged buyout.  Last week, the Delaware Chancery court ruled that the buyout price was woefully low.  It said that a fair offering to shareholders would have been $17.62 a share (how precise!), not the $13.75/share actually paid.

Dell does not have to compensate many former shareholders, however.

What’s this all about?

Delaware rules

Most US companies are incorporated in Delaware, where the rules are well-tested and generally favorable toward business.  In Delaware, if holders of 90% of the outstanding shares of a takeover target accept the acquirer’s offer, the remaining 10% can be forced to do so, too.  Other US states and other countries may have different thresholds, but they also typically have similar rules to eliminate potentially bothersome small minority holdings.

Minorities aren’t completely without rights in Delaware, however.  They are allowed to refuse the offer and appeal the valuation in court.  This is a long and expensive procedure–three years in the Dell case.  At the end of the day minorities are not allowed to keep their shares.  The issue is solely about the price they get for selling them.  (Shareholders who are in the 10% because they don’t vote, or who don’t participate in the lawsuit, just get a check in the mail for the original takeout price.)

This is what happened with Dell.  It’s also the reason that Dell only has to compensate those who sued.  The vast majority of former Dell shareholders freely accepted a takeover offer that we now know was way too low.

T Rowe Price 

The money management firm’s internal analysis was that the Dell offer was inadequate.  It also appears to have taken part in the suit.  But the firm somehow made an administrative error in 2013 and voted to accept the Dell offer, not to protest the valuation.  The court ruled that T Rowe Price is stuck with that decision, even if it intended to do the opposite.  So it won’t benefit from last week’s ruling.  In fact, it is going to have to figure out how to pay people who owned funds containing Dell shares the $194 million they would have had, were it not for the voting mistake.  This will likely be a real pain in the neck, since it involves clients from three years ago, who may not sill be holding the funds affected.

 

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