Court rules that the Dell buyout was way underpriced in 2013 for $24.9 billion by about 22 percent, which may prompt the company to pay tens of millions to investors who opposed the deal for the computer maker. A Delaware judge ruled that the Michael Dell and Silver Lake Partners deal was too underpriced.
The court ruling, which applies to about 5.5 million Dell shares, is a victory for the specialized hedge funds that have increasingly tried to squeeze more money from mergers using a type of lawsuit known as appraisal, the BBC reports. The Delaware lawsuits allow investors who oppose a deal, such as the bitterly contested Dell buyout, to sue and ask a Delaware judge to determine a fair deal price.
While the court rules the Dell buyout was underpriced, activist investor Carl Icahn urged company shareholders to vote down the deal and take their case for fair value to court. Initially appraisal was sought for about 40 million shares, but the bulk was removed for procedural reasons.
In the court ruling, Vice Chancellor Travis Laster said fair value was $17.62 per share, not the $13.75 per share deal price. With interest, investors who sought appraisal will collect about $20.84 per share.
The investors presented evidence that fair value was $28.61 per share, which would have cost Michael Dell and Silver Lake hundreds of millions of dollars. The Dell buyers contended that fair value was $12.68, Quadrangle reported.
Travis Laster said the Dell buyout took advantage of a dip in the company’s stock price and its board never determined the intrinsic value before negotiating. “The original merger consideration was dictated by what a financial sponsor could pay and still generate outsized returns,” wrote Laster.
The Delaware judge dedicated much of the opinion to explaining why deal price was not a fair value indicator, particularly in a management-led Dell buyout. Judges had used deal price in appraisals involving the closely watched similar buyouts of Ancestry.com in 2012 and BMC Software Inc in 2013.
The added cost to the buyers from Tuesday’s ruling is about $36 million. About 3.9 million appraised shares were held by affiliates of Magnetar Capital.
A number of hedge funds have built a strategy of swooping in just before a deal closes, when there is less risk a deal would collapse, and buying stock for the sole purpose of seeking appraisal.
Investors who seek appraisal do not get paid at the deal’s closing, but they collect interest of 5 percentage points above the federal discount rate while the case is pending. The U.S. Chamber of Commerce has complained that that encourages hedge funds to bring cases because they can earn a return even when a deal price is found to be fair.
One of the biggest losers from the Dell buyout case may be T Rowe Price, one of the few mutual fund managers to test the appraisal strategy. Dell was able to knock out T Rowe Price’s stock, which comprised the bulk of the shares in the case, because the fund manager mistakenly voted in favor of the buyout.
CNBC said that as the court rules the Dell buyout being too underpriced, documents revealed T Rowe Price stood to collect around $190 million if its Dell stock had been appraised. Laster also ruled on Tuesday the fund manager was not entitled to interest on its shares.