Negotiators and other decision makers sometimes have the difficult task of remaining impartial when facing a conflict of interest. The actions of the special committee of Dell’s board as the company’s CEO and founder, Michael Dell, moved forward with a leveraged buyout suggest precautions you can take when navigating such delicate situations.
Taking stock of an offer
In August 2012, Michael Dell and private equity firm Silver Lake approached Dell’s board with a proposal to take the company private. In recent years, Dell had slipped from first to third place in the personal-computer market, which itself had been losing ground to tablets and other handheld devices. Michael Dell said that taking Dell private was the company’s best hope for transformation, free from the pressure of generating short-term earnings for public investors.
Dell’s board appointed a special committee to study its alternatives, the New York Times reports. Because Michael Dell faced a conflict of interest as a potential buyer of his own company, the board wanted to ensure that it got the best deal possible out of him—or could find a better one. After months of study, the committee concluded that the management buyout was a better option than other proposals to keep the company public, such as borrowing money to buy back shares. The committee pressed Dell and Silver Lake hard on price but was unable to gain significant leverage given the lack of alternatives.
On February 5, 2013, Michael Dell announced in an e-mail to employees that he and Silver Lake were offering $13.65 per share to take the company private. The $24.4 billion leveraged management buyout would be financed by about $700 million in cash and equity from Dell, cash from Silver Lake, a $2 billion loan from Microsoft, billions in new debt, and other financing sources. Dell planned to stay on as chairman and CEO of his namesake company. He and Silver Lake needed to convince a majority of Dell shareholders to vote in favor of the deal on July 18.
Controversy and competition
Soon after the deal was disclosed, the two largest holders of Dell stock other than Michael Dell himself, investment firm Southeastern Asset Management and mutual fund giant T. Rowe Price, voiced strong opposition to it, arguing that Dell stock was worth as much as $25 per share when some of the company’s recent acquisitions were counted.
The deal proposal launched a 45-day “go-shop” period intended to flush out other bids. An investment bank hired by the board’s special committee contacted 67 parties about bidding for Dell, but only two alternatives emerged.
First, in late March, the Blackstone Group, led by Stephen Schwarzman, announced that it planned to make a formal bid for Dell worth at least $14.25 per share. Blackstone successfully negotiated with Dell to be reimbursed up to $25 million in bid-related expenses. Dell’s acceptance of this term suggests that it placed a high value on producing a second bidder to guard against criticism that it was in Michael Dell’s back pocket, according to the Times.
Second, activist investor Carl Icahn launched a scheme to block the Michael Dell–Silver Lake offer through a proxy battle for Dell’s board and an offer of $15 per share for 58% of the company. In negotiations with the board’s special committee, Icahn agreed not to acquire more than 10% of Dell’s shares in return for the limited ability to try to forge a competing bid with other shareholders. Icahn publicly accused Michael Dell of trying to profit at the expense of his own company by undervaluing its worth.
A delayed vote
The Blackstone Group withdrew from the bidding process in mid-April, claiming that Dell’s books had revealed that the company’s business was rapidly deteriorating. In reaction, Dell shares fell almost 4%, to just below Michael Dell’s bidding price. Meanwhile, Icahn found a partner in disgruntled Dell investor Southeastern Asset Management, but the special committee judged their offer to be too risky.
In early July, Michael Dell revealed—apparently at the insistence of Silver Lake, which was growing nervous about the deal’s long-term profitability as Dell stock dipped—that he and his partner would not sweeten their offer. The board’s special committee urged shareholders to vote in favor of the deal, warning that Dell stock could fall as low as $5.85 per share by the end of the year based on disappointing first-quarter earnings.
The night before the scheduled shareholder vote, the special committee and the would-be buyers managed to convince a number of Dell’s biggest institutional investors to switch their votes to yes. But a few minutes after the meeting began, the board adjourned it for six days.
Preliminary tallies had indicated that the buyers didn’t yet have a majority behind them. Michael Dell’s 16% stake was excluded from the vote. He and Silver Lake needed to win 42% of the remaining votes. Icahn and Southeastern controlled 12.5%. And for various reasons in addition to opposing the deal, the holders of about 27% of Dell shares abstained from voting—and according to the rules, abstentions counted as votes against a buyout.
More delays—and a decision
On July 24, Michael Dell and Silver Lake raised their per-share offer by 10 cents to $13.75 plus an eight cent special dividend on top of an already scheduled third-quarter dividend of eight cents per share. In exchange, they asked the Dell board to drop the rule that votes not cast for or against the deal be counted as no votes. The special committee postponed the vote once again, this time to August 2.
The board committee rejected the revised offer, telling Michael Dell privately that he would need to come up to $14 per share. Dell and his main partner at Silver Lake, Egon Durban, hashed out a potential compromise. Given that Dell had told the Wall Street Journal that $13.75 was their best and final offer, they would lose credibility by raising the share price—so instead they bumped up their special dividend to 13 cents.
The special committee accepted the new final offer—the equivalent of $13.96 per share—and agreed to change the voting rules as requested. Another rule change allowed new Dell investors to cast votes, who were expected to support the deal. Finally, the board pushed back the vote a third time, to September 12. More large Dell investors came out in support of the revised deal, and shares in Dell jumped 5.6% in response to the news, to $13.68.
At a hearing on August 16, a Delaware judge refused to expedite claims by Icahn that the Dell board had breached its fiduciary duties. The decision vindicated the special committee’s efforts to appear independent of Michael Dell and effectively ended challenges to the buyout, according to the Times.
The final vote (unknown at this writing) was still expected to be close, but most observers predicted a victory for Michael Dell and Silver Lake. Whether the buyout succeeds in the long term is an entirely different question.
Lessons from a complicated deal
- Face conflicts of interest head-on. The Dell board took measures to guard against appearing too soft in its negotiations with Michael Dell, forming a committee to spearhead the search for alternatives and to negotiate hard on price and other issues with Dell.
- Anticipate bumps in the road. In his interview with the Wall Street Journal, Michael Dell admitted to being surprised by Icahn’s challenge and by the low vote turnout. Yet both of these problems could have been anticipated earlier in the bidding process.
- Watch your language. Michael Dell’s announcement that he and Silver Lake were making their best and final offer in late July proved to have been premature. Use such definitive language carefully, as your credibility could suffer if you back away from it later.