Dell Valuation Ruling Shouldn’t Spook Private Equity
There has been some speculation that the recent Dell valuation ruling will put a chill on public-to-private buyouts, particularly ones that include members of company management on the buy-side. Sorry, but I just don’t see it.
For starters, let me express clearly that I believe the Dell appraisal to be absurd. Not just the general notion of a judge being able to effectively change the deal price of a competitive process with no funding of wrongdoing, but also the idea that 2013 Dell could only be fairly valued via a discounted cash flow model. Or that private equity bids, somehow, aren’t a legitimate part of the market (leveraged through they may be).
Remember, a lot of prospective bidders viewed Dell as a falling knife whose business was severely atrophying. It does not appear that Delaware took those more subjective concerns into account, nor the associated risk assumed by Michael Dell and his private equity partners at Silver Lake. Also not seemingly addressed by the court were broader value questions of whether Michael Dell would stick around were his group to have lost, let alone if the company were somehow forced to remain public (or with a public stub).
More importantly, however, the actual cash being paid out is relatively small. Thanks in part to T. Rowe Price’s third-party fat finger, the total payout comes to less than $25 million. Michael Dell could personally write that check without losing a minute’s sleep.
There might be some worries that the Dell ruling will encourage more appraisal lawsuits ― perhaps on Dell’s proposed purchase of EMC Corp. (EMC)― but even successful efforts should remain relatively small given that:
(a) Not too many shareholders can participate, or else the deal won’t pass in the first place; and
(b) There remains a risk of losing such suits, and having court find that the deal was actually overpriced (yes, this has happened). In such cases, it might be better to provide investors with an underwhelming but guaranteed return than a smaller one than everyone else got.
So while the Dell ruling was a raw deal, it shouldn’t have too much impact on future ones.