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“Dell Undervalued
in Sale Process”
continued
Valuation Vantage
Fall 2016 | 8
COURT’S CRITIQUE OF THE SALE PROCESS
The Court found Dell’s sale process to be flawed for the following
reasons:
1. The Committee only engaged with financial sponsors in the
pre-signing phase.
2. There was limited competition from potential bidders in the
pre-signing phase.
3. The Company conceded that an LBO model is not “oriented
toward solving for enterprise value.”
4. An LBO model can be used to predict with a high degree of
accuracy the range of offers that a target corporation can
expect from financial sponsors.
5. An LBO model solves for an IRR and not present value, so it
is not indicative of fair value. The goal of Silver Lake in using
an LBO model was to achieve an IRR of 20% or more. Also,
Silver Lake limited the amount of leverage that could be
used in the deal.
6. Since the sale process depended on the willingness of
financial sponsors to sacrifice potential IRR to win the deal,
it was not indicative of intrinsic value.
7. The Committee did not seek to determine a pre- merger
going concern value for the Common Stock to determine
the fairness of the merger consideration to the Company‘s
unaffiliated stockholders.
8. The Committee did not take into account valuation
adjustments that should have been made for a depressed
market for Dell’s stock. This is especially the case since Dell
made significant long-term investments that were not being
recognized by the market in the short-term.
9. The go-shop period only resulted in proposed MBOs from
financial sponsors.
10. The CEO’s decision to have a 75% equity stake in the
Company post-close meant any price above $15.73 per
share would mean the CEO would lose control of the
Company. This assumes that the CEO would not contribute
additional equity. Therefore, any offer price above $15.73
per share would be very difficult to achieve unless the CEO
was willing to give up the opportunity to have a 75% stake in
the Company.
EXPERTS’ VALUATIONS
The Petitioners’ expert determined Dell’s per share value to be
$28.61. However, the Court did not find this per share value to
be credible. The Court came to this conclusion since strategic
companies in Dell’s industry would have implied the Company
could be purchased at a great value given its stock price was
$9.35 at the time indications of interest were first given. In
contrast, the Respondent’s expert determined Dell’s per share
value to be $12.68.
Both the Petitioners’ expert and Respondents’ expert considered
the BCG 25% Case forecast to be reliable. Also, the Court noted
that BCG was a third party. However, the Respondent’s expert
then adjusted this case to account for the Company’s failure to
meet its forecast. In the process, the Respondents’ expert used a
current PC sales forecast from IDC to determine this adjustment.
Although the Court typically does not approve litigation-driven
adjustments to management projections, the Respondent’s
expert adjustments were considered by the Court to be reliable.
The Petitioners’ expert’s use of the BCG 75% Case forecast were
not considered to be reliable. The Court approved the both
experts’ use of the Bank Case forecast since it was nearest to the
closing date of the MBO. The Respondent’s expert’s version of
the Bank Case forecast was considered to be more reliable since
it accounted for non-recurring restructuring expenses and stock-
based compensation. The Court decided to equally weight the
Respondent’s expert’s adjusted BCG 25% Case forecast, which
was slightly conservative and the Respondent’s expert’s adjusted
Bank Case forecast, which was slightly optimistic in determining
Dell’s DCF valuation.