Dell LBO analysed

Author: Zoe Thomas | Published: 26 Sep 2013
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  • The $24.9 billion leverage buyout (LBO) of the US IT company Dell, by its founder Michael Dell and the private equity firm Silver Lake Management, completed in September following months of negotiations;
  • To complete, the offer’s voting process had to be changed to require shareholder approval from only a majority of unaffiliated votes cast;
  • The new process eliminated the issue of empty votes, that would have favoured the minority position and activist investors Carl Icahn and Southeastern Asset Management;
  • The deal’s 45-day 'go-shop’ enabled the committee to assert it had actively looked for committing bids. It could be a model for future deals

The $24.9 billion leverage buyout (LBO) of the US IT company Dell, by its founder Michael Dell and the private equity firm Silver Lake Management, completed in September following months of negotiations.

The deal helped highlight issues relating to 'empty voting’.

In July, Michael Dell and his investor allies requested a change to the deal’s shareholder voting procedure, which required the purchasers to obtain only a majority of the unaffiliated votes that were cast. The original voting process had enabled only a small amount of dissenting votes to block the offer.

The move brought Dell back to the negotiating table and saw the deal value rise by two percent, once the buyers agreed to pay an additional dividend. It also prevented the activist investor Carl Icahn, and Southeastern Asset Management, from blocking the deal through his minority holding and nullified his threats to a proxy battle, if Dell’s offer was voted down.

But investment adviser and retired lecturer at McCombs School of Business Jim Nolen, told IFLR the deal would prompt investors to more closely consider their contracts in future.

"In their effort to be transparent, the special committee wrote a contract that they thought would shield the board and that backfired on them," he said. "I think in the future people will look at this contract and think if there is no requirement for a vote would we want to have one and should it be like this? Do we want to give a hostile bidder an opportunity to take over based on taking absent votes?"

See also

US tender offer threshold drops to 50%

Leveraged finance quarterly: transatlantic decision-making

What Europe’s LBO debt wall means for the future of financing

The offer

This month’s final votes brought closure to a long and public battle, between Michael Dell, his private equity partners and the special board committee, to take Dell private.

The special board committee was formed to examine the offer and ascertain the best outcome for shareholders. It commissioned the global management-consulting group Boston Consulting Group, to review available options, source strategic investors and put in place rigorous restrictions, in order to prevent certain communication with involved parties.

The LBO was motivated by an ongoing decline in Dell’s share value, in line with a general fall in the use of personal computers. In spite of in-depth due diligence, no other possible purchases or group made a formal offer to buy the company.

With the culmination of Dell’s LBO, its shareholders will receive $13.75 per share, along with a 13 cents dividend and an eight cents regular dividend paid in the third quarter.

The deal is expected to be finalised before the end of the IT company’s fiscal third quarter.

The voting process

The original voting process agreed to by this special committee and Dell required a majority of unaffiliated shareholders to support the offer. Dell’s 15% stake was excluded from the vote as were those held by the company’s board. Absent votes would have bolstered the minority position by assuming the opposed the offer.

When Icahn - who holds a nine percent stake in the company - began building up opposition to the offer, Dell moved to have the voting structure changed arguing it would be fairer to shareholders.

The change was opposed by Icahn. He tried unsuccessfully to have the US’s Delaware court block the move, arguing the company had violated its duties by not obtaining the best deal possible and splitting the special shareholders vote from the annual meeting. But the Judge ruled Icahn and others were given adequate time to evaluate the offer and make their own alternative bids.

The new voting process pushed back the record date for eligible shareholders to vote allowing short-term investors to vote. The negotiations to change the process also brought shareholders an additional 13 cents divided, and solidified when a vote would be held.

Even so, the vote lacked the support it needed to pass and had to be postponed several times. Icahn raised further concerns as to whether a majority of unaffiliated shareholder would be properly represented under the altered voting structure. To which Dell, and eventually the special committee, argued the change benefited ordinary shareholders in favouring those who cast votes rather than assuming the silent votes were aligned with the minority or dissenting view.

The deal gradually gained shareholder approval, as those involved wrestled with the company’s value in a changing industry.

Those close to the deal said negotiations between Icahn and the special committee were kept consciously public throughout, and his involvement had little effect on the market’s view of Dell.

'Go-shop’ Period

"Icahn couldn’t block the vote but he still maintains his appraisal rights," explained Nolen. "He could argue the board breached its contract by accepting a bid that was too low and failing in its fiduciary responsibilities to minority shareholders. But it would be hard to prove the value was low when there were no bids made during the offer’s 45-day shop period."

The deal’s long and open go-shop process might also be a model for future deals. It allowed for a 45-day period during which the committee could actively seek alternative offers.

It thereby ensured that qualifying offers that came in during that time, could negotiate in private after the go-shop had closed. A successful bid only had to bare a $180 million termination fee, just one percent of Dell’s original offer.

Speculation of completing offers circulated. The private equity giant Blackstone, in particular, spent a great deal of time on due diligence. No other offers ever developed and after the go-shop period the proxy letter was issued.

Related articles

US tender offer threshold drops to 50%

Leveraged finance quarterly: transatlantic decision-making

What Europe’s LBO debt wall means for the future of financing