The Delaware Court of Chancery’s just-published opinion in the Dell Inc. statutory appraisal action, which arose out of the 2013 management buyout led by the company’s founder, Michael Dell, has stunned finance professionals. How could the court find the deal price did not reflect fair value while recognizing that the board and Dell himself made every effort to perform a proper sale? The board appointed a special committee, which hired financial advisors, which prepared copious valuations as the transaction unfolded. Moreover, several recent decisions from the Chancery found the merger price was the most reliable indicator of value.
Shareholders shortchanged: In the Dell buyout, the final merger consideration was $13.75 per share (plus a $0.13 special dividend), whereas the court, performing a discounted cash flow analysis that drew on analysis from both sides’ experts, came up with a value of $17.62 per share. There were about 1.76 billion shares outstanding. In other words, Dell sold the company for about $7 billion too little. The crux of the Chancery’s long and dense opinion is that a statutory appraisal determination is not an investigation of a breach of fiduciary duty claim. Although no one in this transaction breached any fiduciary duty, the common stockholders also did not receive fair value.
According to the court, there was “a lack of meaningful price competition during the pre-signing phase,” and the post-signing phase, which included a go-shop period, did not cure this defect. The paramount problem was that the players all were financial sponsors—there was no outreach to strategic bidders—and all the valuations driving the merger were premised on leverage buyout models, which calculate what a financial investor would be willing to pay to achieve a certain internal rate of return. That’s not a “fair value” determination, the court said. “Fair value” under the appraisal statute means “the value to a stockholder of the firm as a going concern as opposed to the firm’s value in the context of an acquisition or other transaction.”
As for the two bids that came in during the go-shop period and that led to a 2% increase in the final merger consideration, they ultimately went nowhere. If anything, the court said, the two bids showed that the original merger price was too low. Worse, for the respondents’ case, the fact that the two bids exceeded the final merger price “undercut the notion that the Final Merger Consideration provided fair value.”
Valuations way apart: At trial, both parties’ experts used a DCF analysis and achieved startlingly different results. The petitioner’s expert said the company had a fair value of $28.61 per share on the closing date; the respondents’ expert said the value was $12.68 per share. “Two highly distinguished scholars of valuation science, applying similar valuation principles, thus generated opinions that differed by 126%, or approximately $28 billion. This is a recurring problem,” the court observed.
The court, which spent most of the opinion discussing appraisal jurisprudence, focused its relatively short DCF discussion on areas of substantial disagreements between the experts. Next week’s BVWire will report on the disagreements and the court’s resolution.
Read the opinion: BVLaw offers a complimentary download of the court’s opinion, In re Appraisal of Dell Inc., 2016 Del. Ch. LEXIS 81 (May 31, 2016). There will be an extended discussion in the August issue of Business Valuation Update.