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%.