Monday, July 29, 2013

Dell's Special Committee Backed Into A Corner: The Company is the Loser

CEO Michael Dell and his reluctant partners at Silver Lake have come with a "dime," that is they have upped their price for Dell to $13.75 a share.  Their only condition: the Special Committee of the board has to change the election rules so that the decision would turn on a majority of the unaffiliated common shares voting in person or by proxy; the non-voting shares would no longer be automatically considered as voting against the proposed transaction.

On the face of it, an impartial observer without any history or context, might say that this is reasonable.  Dell/Silver Lake's letter characterizes the previous schema for counting votes as not being "rational."  This is overreaching.  Let's go back to get some context.

Dell has been mismanaged during Michael Dell's second apparition as CEO.  All the current challenges of the PC business have been evident for many years, although the trends have certainly accelerated.  According to Bloomberg, Dell spent $12.9 billion for 18 acquisitions from 2009 to 2012, and then spent $5 billion in 2012.  These were to transform the company into a higher end server, storage, and SaaS company.  Remember that the shareholders' cash was spent under the glare of being a public company.  There was no shareholder revolt, but so far the value of these acquisitions has not materialized.  The board during all of Mr. Dell's tenure never held the management team accountable for mismanaging operations and the firm's financial resources.  

Once the CEO came forward with Silver Lake Partners, the board had to be very careful about not appearing as patsies for Michael Dell coming in to rescue the shareholders from the fruits of his own mismanagement at a bargain price.  They went so far as to survive shareholder actions in Delaware court, where the Chancellor described the Special Committee's "go shop" process as being transparent, value seeking, at arm's length from the CEO, and otherwise exemplary of the duty to maximize value.  Part of the process were the election rules, which Michael Dell and Silver Lake had agreed to before the current kerfuffle began.  Apparently, the rules were palatable then, but not now. 

Probably, the Dell/Silver Lake team were convinced that tired, frustrated, long suffering shareholders would be happy to get some cash back, take their losses in a frothy market and move on.  PC results continued to move south as industry shipments declined 11% in the most recent quarter. So, either the team were expert game theorists or they were hugely overconfident.  

On the other side, Carl Icahn's mercurial, press release-driven behavior did nothing to give shareholders an apples-to-apples value to compare to $13.65 a share from Dell/Silver Lake.  It seems like the Special Committee did its best to engage the Icahn/Southeastern group to come up with a firm, fully financed offer, but this didn't happen.

Stopping the election in mid-process makes a joke out of corporate governance.  This kind of tactic is more proper to banana republic-style elections, but it is inexcusable for an NYSE company.  Perhaps, the Special Committee feared that the $13.65 offer would be rejected without a firm alternative in place.  Stopping the process would give a last chance to either get Dell/Silver Lake to raise their offer OR for Icahn et al. to come up with a definitive offer.

In actual fact, Silver Lake Partners would walk away with the most money under the latter scenario of a superior offer from others.  Rationally (and I use that term loosely), Silver Lake probably would rather get their expenses paid, take a pour boire and walk away for better risk-adjusted investment opportunities.  

So, in the end where is the biggest loser?  Dell Inc.--the company management, its employees, supply chain partners, developers and stakeholders here and abroad.   Value has been consistently destroyed by a process that has been allowed to run amok.

In the end, the Special Committee which received Chancellor Stine's kudos for running such a great "go shop" process, may prove to have been an unwitting, or half-witted, patsy for a CEO's simple mismanagement and extraordinary chutzpah.  

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