Thursday, July 25, 2013

Playing Poker with Your Lawyer as an Adviser: Dell

Playing Poker with Your Lawyer as an Adviser: Dell

The Dell saga began as a detailed fundamental analysis of the company’s prospects.  After conducting this exercise, Michael Dell and his co-investor, Silver Lake Partners, figured they could pay $13.65 per share for the company.  For a brief period of time, Blackstone engaged in the process of valuing the company using Dell’s checkbook to conduct their due diligence.  Blackstone decided not to bid.  Carl Icahn entered the fray and came up with a stock and cash deal that would retain Dell as a public company.  A special committee of the board, after digging through all the numbers, endorsed Mr. Dell’s proposal and recommended it to shareholders.  All these proposals were developed over many weeks and months in a very deliberate process.
Discretion (1995)
As the shareholder meeting to vote on Mr. Dell’s proposal approached on July 13th, the takeover battle over Dell shifted from an investment exercise into a game of poker. An array of interests gathered around the table, and the bidding and bluffing moved at an accelerated pace.  Sitting at the table, there’s Mr. Dell, of course, showing his offer.  However, Mr. Dell isn’t permitted to vote his shares (he owns 14% of the company).  Mr. Icahn, Southeastern Asset Management and T. Rowe Price, representing 16% of the vote are on the opposite of the table, and have voted “no.”  Scattered around the rest of the poker table are a variety of long-term investors, hedge funds, and traders, some of whom have voted to endorse the deal, others who oppose it, and a chunk who haven’t voted at all.  Those who haven’t cast a ballot count as “no” votes under the rules.  As of today, Mr. Dell doesn’t have the votes.

As the Special Committee anxiously looked around the table yesterday morning, Mr. Dell, as I’d expected, increased his bid.  But, he threw in a mere 10¢ per share (that’s still a $150 million increase).  However, he added a wrinkle.  He insists that the Special Committee change the rules of the game; non-voters must no longer be counted as “no” votes.   If the Committee doesn’t accede to the demand, Mr. Dell insists that he’ll withdraw his 10¢ increase by nightfall.   You must imagine that as Mr. Dell contemplated his latest proposal lawyers were whispering in his ear, because the request for a change in the rules is likely to become an issue before a Delaware judge.  Meanwhile, another group of lawyers were surely whispering in Mr. Icahn’s ear about Mr. Dell’s tactic. As expected, Mr. Icahn was outraged.
Will Mr. Dell withdraw his 10¢ increase if the Committee doesn't change the rules by his deadline?  I doubt it. Will the Committee counter his offer by proposing that he increase his offer to something like $14.00 in exchange for the rule change?  There are already rumors to that effect.  Here’s where the game of poker gets very interesting.  Will Mr. Dell agree to go to $14.00?  It would cost him over $500 million over his original proposal.  If he raises his bid by 35¢, will it change enough votes?  Will Mr. Icahn, Southeast Asset Management, and/or T. Rowe’s vote for the deal?  My guess is that T. Rowe might come around, but I think Mr. Icahn and SAM are unlikely to fold.  Will the abstaining shareholders now vote for the deal?  The answer depends on who owns the abstaining shares.  If those shares are now in the hands of traders (known as arbitrageurs), then the answer might be “yes”, because they would be able to turn a quick profit having recently acquired the shares.  My guess is that it will take a few days for this game to be completed, followed by a round of court hearings.  I still think Mr. Dell will win, but it is possible he’ll walk away from the table if the game gets too rich.

As is very often the case in these situations, the employees, who aren’t even sitting at the table, will be the biggest losers.  Over 100,000 Dell employees have been watching this saga unfold over the last six months as the company’s profitability shrinks.   As the takeover price rises, the pile of pink slips will grow ever larger. 

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