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In November 2012, Wall Street equity research analysts

indicated a per share value of $8.50, which was well below

the indications of interest. As a result, this prompted the

Committee to hire Boston Consulting Group (“BCG”) as an

independent advisor on the Company’s forecasts. KKR then

pulled out of the competition to acquire the Company, which

prompted the Committee to reach out to other private equity

firms. In early 2013, BCG prepared a base case forecast

assuming $3.3 billion in cost savings from a proposed MBO.

BCG then assessed the likelihood of the cost savings in its

forecasts with 25% of savings realized (“BCG 25% Case”) and

75% of savings realized (“BCG 75% Case”). BCG concluded

that the BCG 25% Case was the most likely to occur given

the Company’s track record of cost-saving initiatives. In the

meantime, the effort to reach out to other private equity firms

yielded no additional offers.

Dell hired Evercore as a second financial advisor for a go-

shop period. Evercore came up with a DCF valuation ranging

from $14.27 to $18.40 per share. It also determined an LBO

valuation ranging from $12.36 and $16.08 per share assuming a

financial sponsor required an IRR between 15% and 25%. After

a go-shop period that yielded no offers from potential strategic

acquirers including HP, but two additional offers from financial

sponsors, the deal was finalized with Silver Lake offering $13.75

per share for Dell’s shares. JPMorgan and Evercore opined that

the deal was fair from a financial point of view.

FINANCING FOR THE DEAL

In order to obtain debt financing for the deal, Dell and Silver

Lake submitted a forecast to banks (“Bank Case”). The

Bank Case was more optimistic than analyst reports or an

International Data Corp. (“IDC”) report on PC shipments in

terms of the Company’s expected growth. Also, the Bank

Case assumed Dell’s profit margins would increase over the

next five years. After the debt financing was obtained, 70%

of the Company’s shareholders approved the deal. The deal

then closed in late October 2013. Some shareholders of Dell

not affiliated with the CEO (“unaffiliated shareholders”) voted

against the deal and filed for an appraisal in the Delaware

Chancery Court (the “Court”).

Dell Undervalued

in Sale Process

Valuation Vantage

Fall 2016 | 7

In Re: Appraisal of Dell, Delaware Chancery Court, Civil Action

No. 9322-VCL (May 31, 2016)

Dell Inc. (“Dell” the “Company,” or the “Respondent”) received

written appraisal demands from certain Dell shareholders

(“Petitioners”) as a result of an allegedly low price for Dell’s

management buyout (“MBO”).

BACKGROUND

In 2012, Dell began to make efforts to prove that its stock was

worth more than the value determined by the stock market.

In particular, the Respondent’s CEO marketed the Company in

the financial media in a “sum of the parts” manner. This was

an attempt to get Dell’s stock price closer to the level from the

Company’s internal valuations. However, this was not achieved

since the Company was not able to meet its aggressive forecast

expectations. As a result, the Company began entertaining

the possibility of an MBO from private equity firms including

Southeastern Asset Management (“Southeastern”), Silver Lake

Partners (“Silver Lake”), and Kohlberg Kravis Roberts (“KKR”). The

Company’s board of directors then formed a special committee

(the “Committee”) to evaluate a potential transaction and other

strategic alternatives. As part of this committee being formed, it

hired JPMorgan as its financial advisor.

SALE PROCESS

JPMorgan performed a series of analyses including a discounted

cash flow (“DCF”) analysis based on Wall Street consensus and

forecasts from September 2012 (“September Case”) indicating

a range of $15.25 to $19.25 per share and $20.00 to $27.00 per

share, respectively. In October 2012, the Company hired Goldman

Sachs to help it prepare for management presentations. As part

of this process, Goldman Sachs determined a per share value of

$16.00 based on the September Case.

Silver Lake and KKR then provided indications of interest ranging

from $11.22 to $13.00 per share, but excluding the CEO’s shares.

Despite these indications showing premiums ranging from 20% to

40% above Dell’s stock price, they were still well below the various

DCF analyses performed by JPMorgan except for the DCF analysis

based on the low Wall Street forecasts for the Company. Also,

the internal rates of return (“IRR”) implied by the indications of

interest were well above 20%.