latest developments

The New York Times reported yesterday that influential investment manager T. Rowe Price has joined the chorus of holders of DELL who are protesting that company’s board-approved proposal to be taken private by CEO Michael Dell and private equity firm Silver Lake at a price of $13.65 per share.

DELL’s largest institutional shareholder, Southeastern Asset Management of Tennessee, who we now know from a 13-D filed with the SEC owns 8.44% of DELL’s common (acquired at a price of just below $16 a share), seems to be leading the opposition to the deal.  

Specifically:

–Southeastern has published on its website an open letter to DELL, in which it outlines its argument that the company is actually worth about $24 a share, almost twice what the board has okayed as an acquisition price.  

–In the letter, Southeastern also gives a thumbnail sketch of a plan, using brokerage house earnings estimates, by which DELL could leverage itself (to the sky), pay shareholders a $12 special dividend and still be able to generate annual free cash flow of over $1 per share.

The NYT Southeastern has hired a proxy firm and a mergers and acquisitions lawyer.  In its letter Southeastern says it intends to pursue the matter through a proxy fight, lawsuits and, if I understand correctly, an appeal to the Delaware Chancery Court.

what I find interesting–and worth monitoring

–Southeastern is really upset, in a way I can’t recall ever seeing in a US-based institution.

It isn’t opposed to having DELL go private per se, only to the combination of preventing existing shareholders, ex Michael Dell, from participating, and what it sees as the low-ball price.

–Proxy fights are tricky things.  Why?  Individual investors support management overwhelmingly, even when it’s loony to do so.  It’s also hard to tell how much stock has been scooped up by arbitrageurs in the high-volume trading of the past month.  These guys aren’t in this for the long haul.  They want a quick profit and an exit.

Experience tells me it will be extremely hard for Southeastern to come up with enough votes to block the deal.  But it sure does seem motivated.

Always an advocate of the ad hominem argument (e.g., “You’re ugly!”), I wonder how the directors make out in this deal.

–Southeastern says in its letter it intends to avail itself of  “any available Delaware statutory appraisal rights.”

Here’s what I think this means:  if a tender offer is successful in acquiring 90%+ of a company’s stock, the buyer can go to court and compel the remaining 10%- to tender their shares.  That 10%- have recourse, though.  They can appeal to the court for a hearing to argue that the price is too low.  If successful, they (and no one else) receive the court-determined higher price.

I’ve only followed this kind of appeal once.  The process took three years.  During that period, the company in question deteriorated markedly.  It turned out in hindsight that the acquirer had paid a crazy-high price.  So the court stated the (now) obvious–that the original price was too much.  So the reluctant 10%- ran up a pile of legal bills and got the original acquisition price, only three years late.

I wonder how things will turn out this time.

nits (or maybe slightly bigger issues) to pick

I understand the Southeastern letter only has the bare bones of its valuation argument.  Still, I view DELL has having much less cash than Southeastern assumes.  Yes, it’s there as $$$ on the balance sheet.  But a lot comes from DELL being able to hang on to the money it gets from customers before it needs to pay suppliers–sort of like a restaurant that gets cash every day but only pays for vegetables, rent and power at the end of the month.  Another big chunk comes from advance payments from corporate customers for IT services.  That’s sort of like magazine subscriptions, where the publisher gets money as much as a year before he puts the last issue in the mail to you.  Yes, things are fine in both cases as long as the business expands.  But the money evaporates if the business begins to contract.  As I read the balance sheet, DELL’s cash, net of these timing differences and   debt, is around zero.

Borrowing a gazillion dollars does mimic what I imagine Silver Lake intends to do as/when it takes DELL private.  Pay that out in a special dividend as Southeastern suggests is an alternative to going private, however, and how is the now highly leveraged company ever going to pay the principal back?

I understand that Southeastern wants to use third-party figures in its public analysis, but I find it humorous that its authorities are:  a management whose performance has lost 2/3 of the stock’s market value in a rising market; and Wall Street securities analysts who, as a group, are notoriously optimistic and deeply beholden to company management.