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But this is all kind of dumb. This is called the efficient markets hypothesis. Every once in a while a famous investor will rent out a ballroom and give a three-hour presentation about why a stock is going to go up or down. But these presentations are actually relatively rare. Mostly when investors think a stock is going to go up, they buy the stock. You don't even need a ballroom. Structurally, this argument tends to be expressed by the people with the long-term visions, who feel that they're being undervalued.

Companies sometimes buy back their stock because their managers think the market undervalues it. And companies that aren't already public perhaps put off going public to avoid all the short-termism, or, if they do go public, do it in ways that insulate the managers from the markets' short-term focus. One person who thought his company's stock was undervalued by a short-term public market is Michael Dell, the founder and chief executive officer of Dell Inc.

He made this argument in boring verbal ways Dell lamented that the market just "didn't get" the Company. Dell conferred with his management team and hired consultants to devise strategies to help the market view the Company as "a sum of the parts. Dell regularly communicated his views to analysts. Unsurprisingly this didn't work. So he made the argument in a more persuasive way: And then most of those shareholders were thrown out of court for hilarious legalistic reasons that don't concern us here, though they have concerned us previously.

Michael Dell Bought His Company Too Cheaply - Bloomberg

But their best argument will always be: And that is a pretty good argument! The best reply, especially in a conflicted management buyout where the buyer is also the CEO, is often along the lines of "because management deliberately undermined the sales process to prevent other bidders from seeing the company's true value, so they could take it for themselves on the cheap.

It was just an intellectual engagement, a point of principle.

Dell is now a private company | Dell

This is true even though Dell's management explained its long-term plan and "tried to convince the market that the Company was worth more. After all, that's why Michael Dell wanted to take the company private in the first place:. He managed the Company for the long-term and understood that his strategic decisions would drive the stock price down in the short-term. That more or less happened here; the auction was imperfect, but ultimately three private-equity firms put a lot of effort into Dell, with KKR and Blackstone putting in bids at various points before dropping out of the running.

But the basic idea is: Private-equity firms like to buy companies for less than they're worth, so that they can make plus percent returns on their equity investments, so that their own investors will be happy with them and pay them their big fees.

Public investors are satisfied with market-rate returns. Vice Chancellor Laster's DCF calculation used an That is just math.

So you see the problem. Private-equity firms will only buy companies for cheap and lever them up, so they can get the plus percent returns that their investors demand. So Vice Chancellor Laster ignored the price that Silver Lake actually paid, after a quasi-auction among private-equity firms. This paragraph, near the end of the opinion, is deeply weird:. The fair value generated by the DCF methodology comports with the evidence regarding the outcome of the sale process.

The sale process functioned imperfectly as a price discovery tool, both during the pre-signing and post-signing phases. Its structure and result are sufficiently credible to exclude an outlier valuation for the Company like the one the petitioners advanced, but sufficient pricing anomalies and dis-incentives to bid existed to create the possibility that the sale process permitted an undervaluation of several dollars per share.

Given the massive integration risk inherent in such a deal, it is not entirely surprising that HP did not engage and that no one else came forward. So how could any merger deliver fair value to shareholders? This opinion creates its own weird valuation gap. The solution to that short-term-ism might be to go private so you can focus on the long term. But private-equity firms undervalue companies because, let us also assume, they demand an above-market rate of return and so will only buy companies at a discount.

The only buyer willing to pay fair price for a company, apparently, would be a buyer with the relatively long-term focus of private-equity firms and the relatively low-return expectations of public-equity investors. Perhaps such a buyer exists. But it would be a little weird. After all, the higher returns are the compensation private equity gets for taking the longer view and longer-term risks. Why should there be mergers?

Sometimes there are synergies: Company A and Company B will be better off together, because they can sell each others' products or cut back-office costs or whatever. Either way, the merger creates value by making the business better.

That's not what happened in Dell:.

Dell identified for the Committee the strategies that he would pursue once the Company was private, and the record establishes that all of them could have been accomplished in a public company setting. BCG recognized and advised the Committee that the only benefits Mr.

Dell could realize by taking the Company private that were not otherwise available as a public company were i accessing offshore cash with less tax leakage to pay down the acquisition debt and ii arbitraging the value of the Company itself by buying low and selling high. I suppose that sounds derogatory, but there are those who think that "arbitraging the value of the company itself by buying low and selling high" is I don't want to say a noble purpose, but let's say, the most noble possible purpose.

Everyone involved in this case agrees on that. Michael Dell thought -- and said -- that Dell was undervalued. The Dell board said that it was undervalued. Its financial advisers said it was undervalued. Silver Lake thought it was undervalued. When the deal was announced, Carl Icahn said it was undervalued.

EMC and VMware Shareholders Demand Changes to Dell Buyout Deal - Recode

When the deal closed, the appraisal plaintiffs sued, saying it was undervalued. And now a judge has decided it was undervalued. This buyout didn't create value by changing Dell's business model; it created value by changing Dell's ownership -- by moving the shares from people who mostly didn't value them that highly public markets to people who did private-equity buyers. It didn't create synergies or improve Dell's sales, sure, but it did correct an error.

There are those who would say that's a worthwhile thing to do. The court, though, suggests that it isn't. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. In principle there is no reason to think that "public markets are too focused on short-term results" would imply "public markets undervalue companies.

But you more usually hear arguments that imply that markets undervalue, like, research and development or whatever, than arguments that imply that markets overvalue, like, making money today, though there are exceptions. Citations omitted, here and throughout. Here I simplify a long and complicated process. Michael Dell was first approached about a management buyout in June , and first raised it with the board in August. He worked with KKR and Silver Lake on their proposals, which they first submitted in October From the appraisal opinion:.

There were many further revisions. Dell had not been involved in determining the prices. He was content to participate at whatever pricing the financial sponsors obtained. See pages of the appraisal opinion. The big loser was T. Dell and Silver Lake. Earlier this month, a judge disqualified about 30 million shares held by T. Rowe Price Group Inc. To be eligible for the court-ordered price bump, investors must have voted against the transaction.

The mix-up, which T. It's a lot of interest really. In any case, though, there weren't that many of them:. Dell and Silver Lake much because only a tiny fraction of shares are eligible for the bump, because of quirks in Delaware law. The largest holder is hedge fund Magnetar Capital, which has rights to about 3.

The Committee and its advisors did many praiseworthy things, and it would burden an already long opinion to catalog them. In a liability proceeding, this court could not hold that the directors breached their fiduciary duties or that there could be any basis for liability.

And to help Silver Lake get its bid up, he was willing to roll over his shares at a lower valuation. The fact that it closed above the deal price does, of course, suggest that some people thought that it was worth more than that deal price.

Here, from page 33, is a description of the reaction to May earnings:. According to BCG, the quarter "miss [was] HUGE. This isn't dumb short-termism. It's using presently available data -- the only available data -- to try to predict Dell's long-term prospects. What else were the analysts supposed to do? The special committee of independent directors also approached TPG, which "reported to the Committee that it believed the 'cash flows attached to the PC business were simply too uncertain, too unpredictable to establish an investment case.

After the deal was signed, Dell's bankers at Evercore ran a "go-shop" process where they tried to find a higher bidder. They were hopeful for Hewlett-Packard, the obvious strategic buyer, but while HP signed a confidentiality agreement, it "never accessed the data room and did not submit an indication of interest. GE Capital said it was happy to have the Committee consider its offer in connection with any other bid. The opinion has some interesting general statements about why courts shouldn't be too deferential to the market.

Here too, however, the Delaware Supreme Court has eschewed market fundamentalism by making clear that market price data is neither conclusively determinative of nor presumptively equivalent to fair value.

Writing as a Vice Chancellor, Chief Justice Strine observed that even for purposes of determining the value of individual shares, where the stock market is typically thick and liquid, the proponents of the efficient capital markets hypothesis no longer make the strong-form claim that the market price actually determines fundamental value; at most they make the semi-strong claim that market prices reflect all available information and are efficient at incorporating new information.

It is therefore erroneous to "conflate the stock market which is generally highly efficient with the deal market which often is not.

Based on this evidence, the Company makes a straightforward argument: Capitalists want to make money, and America is full of capitalists, so it is counterintuitive and illogical—to the point of being incredible—to think that another party would not have topped Mr. Dell and Silver Lake if the Company was actually worth more. If the Company was really worth more than double what the Buyout Group was paying, then a strategic bidder like HP would have recognized a compelling opportunity and intervened.

Here is the footnote acknowledging that there are other differences. Also the LBO model is usually expressed as solving for a percent internal rate of return hurdle rather than using a percent cost of equity capital and solving for a price.

Here's how the opinion puts it page When proposing an MBO, a financial sponsor determines whether and how much to bid by using an LBO model, which solves for the range of prices that a financial sponsor can pay while still achieving particular IRRs. Although a DCF methodology and an LBO model use similar inputs, they solve for different variables: The opinion is full of stuff like this. The fact that Blackstone and Icahn emerged during the go-shop period "indicates that the Original Merger Consideration was low not only when judged against a fair value metric, but also when judged by an LBO model.

To contact the author of this story: Matt Levine at mlevine51 bloomberg. To contact the editor responsible for this story: James Greiff at jgreiff bloomberg. Bloomberg Anywhere Remote Login Software Updates Manage Contracts and Orders. Facebook Twitter LinkedIn Instagram.

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Based on a court opinion, anyone who buys a company probably buys it for less than it's worth. A daily take on Wall Street, finance, companies and stuff. Before it's here, it's on the Bloomberg Terminal.

Judge Finds Michael Dell, Silver Lake Underpaid for Dell in - WSJ

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