What’s Dell’s Bidding Process Really About? (Clue: It’s Not About Fixing Dell)
Earlier this week, Dell revealed in agonizing detail the arduous months-long process leading up to last month’s $24.4 billion offer by CEO Michael Dell and the private equity firm Silver Lake Partner to take the company private.
Friday’s long-awaited proxy filing by the once mighty Texas computing giant leaves no miniscule step in the process undocumented, starting with the earliest suggestions of such a transaction last June by someone at Southeastern Asset Management, Dell’s largest institutional shareholder, all the way to the preliminary offers made earlier this month by the private equity firm Blackstone and the well-known activist investor Carl Icahn.
The special committee of Dell’s board of directors, charged with overseeing the buyout process as well as the go-shop period that ended a week ago, has said that the interest drawn from Blackstone and from Icahn may turn out to be superior.
But also buried within the 274-page filing are lots of clues that the bidding process has less to do with any concrete plans to turn around a deeply troubled tech company and more to do with making a few private equity firms look powerful and, of course, make money in the process.
And, more to the point, not much yet has to do with what it will take to fix Dell and transform it to face the challenges of the new era of computing. In its document, the company outlined its troubles in detail via a variety of voices — including Dell’s CFO — essentially describing a troubled company in a declining market.
Instead, it’s now solely about the art of the deal. That’s no surprise.
If consummated, a Dell buyout would be a huge private equity transaction, the biggest since 2007, and more than three times the size of the largest buyout deal of 2012.
Also no surprise: As the second largest private equity player according to research firm Private Equity International, Blackstone certainly has to appear to be making a move on Dell.
But here’s the hint that its offer — which is as yet only preliminary and nowhere near final — is being made in part for the sake of appearances. Blackstone requested — and Dell’s special committee granted — that its transaction-related expenses be reimbursed, up to a limit of $25 million.
In other words, Blackstone can make a bid for free and its managers will be able to argue to its limited partners that it took a plausible shot at Dell, even if it misses.
Here’s the relevant section from page 45 of the proxy:
In connection with its submission of the Blackstone Proposal, the Blackstone consortium informed the Special Committee that it was not willing to proceed with its evaluation of the transaction contemplated by the Blackstone Proposal unless, prior to 5:00 p.m. Eastern Time on March 28, 2013, it received an agreement from the Company to reimburse the Blackstone consortium’s out-of-pocket expenses in connection with its evaluation of a possible transaction with the Company and an acknowledgment from the Parent Parties, the SLP Investors and Mr. Dell that such an agreement would not violate the merger agreement.
And later on page 46:
On the morning of March 25, 2013, the Company and Blackstone entered into an amendment to Blackstone’s confidentiality agreement providing that the Company will reimburse the transaction-related expenses of Blackstone and its affiliates up to a cap of $25 million.
This kind of thing can be common — it’s worth noting here, too, that the same $25 million cap applies to the Michael Dell/Silver Lake partnership. That said, there’s no mention made of a similar reimbursement agreement with Carl Icahn.
In any case, the Blackstone bid is definitely making for good theater — Wall Street-starring bidding wars always do.
That has included, for example, the whispered-to-media news that Blackstone was considering offering the CEO job to Oracle president and former Hewlett-Packard CEO Mark Hurd, even though the high-profile exec was actually never interested.
Other names will surely surface as the game of thrones continues. But, in reality, much of the action will have to center on Michael Dell, who owns about 16 percent of the company that bears his name, making his cooperation with any bidder pretty much required. And, for now, he appears to want to stay on as CEO.
Hanging as a backdrop to all this is a closely watched antitrust lawsuit in a federal court in Boston against several private equity firms including Blackstone and Silver Lake. The plaintiffs are a group of shareholders in publicly traded companies that were bought out by several private equity firms between 2003 and 2007. They argue that they lost money because the buyout firms conspired with each other not to bid against one another and thus inflate prices. As evidence, they cite email messages between executives of the firms that give the appearance of an understanding between them. Earlier this month, a judge narrowed the case’s scope but allowed the lawsuit to proceed. (See a PDF of the original complaint here.)
As Reuters columnist Jeffery Goldfarb argued earlier this week, the appearance of Blackstone’s bid improves what Wall Street players often refer to as the “optics” of the deal. He even went so far as to call it “a Potemkin fight,” and one that Silver Lake might welcome. Headlines about a high profile “bidding war” between two of the defendants in the case won’t hurt their assertion that they weren’t cooperating on deals years ago.
Another player in the drama: Investment bank Evercore Group. Tapped by Dell’s special committee to run the go-shop process and scour the world seeking a potentially “superior offer,” page 52 of the proxy shows that it stands to be paid as much as $30 million in fees for its work, “… the substantial majority of which is contingent upon the Company’s [Dell] entering into a definitive agreement for a ‘superior proposal.’”
That’s a sizable payday, and page 42 of the proxy outlines just how eager Evercore has been to earn it:
“During the go-shop period, Evercore contacted a total of 67 parties, including 19 strategic parties, 18 financial sponsors and 30 other parties, including sovereign wealth funds, to solicit interest in pursuing a possible transaction. Evercore also received unsolicited inquiries regarding a possible transaction from four additional parties, including two strategic parties and two financial sponsors. Of the 71 total parties with which Evercore communicated, the 11 parties discussed below expressed interest in evaluating a possible transaction.”
Obviously, there are many more steps to play out in the process before Dell shareholders vote on the matter this summer. Shareholders may in time be rewarded for their patience in holding on to Dell stock, and will be paid a premium for shares that were worth a lot less a year ago.
But make no mistake: There’s a lot of money being made on the deal process itself.