Dell Inc. (DELL:US)’s $24.4 billion leveraged buyout probably will draw criticism from some shareholders over a potential conflict of interest for founder and chief executive officer Michael S. Dell.
Because Michael Dell is part of the group taking the computer maker private, shareholders may claim he is trying to acquire the company at the lowest possible price at their expense. Companies including retailer J. Crew Group Inc. and Kinder Morgan Inc. (KMI:US), a pipeline operator, were the target of shareholder lawsuits after their top executives joined with private-equity firms to buy the businesses.
“The CEO has mixed incentives,” Steven Kaplan, a professor at the University of Chicago’s Booth School of Business who studies the private equity business, said in a telephone interview.
Michael Dell and Silver Lake Management LLC said today they will pay $13.65 a share for the world’s third-bigger maker of personal computers, 25 percent more than the closing price of $10.88 on Jan. 11, the last trading day before Bloomberg News reported the discussions. Michael Dell, the largest stockholder of the Round Rock, Texas-based company with a 14 percent stake as of Sept. 30, will take back majority control.
“I think there are a lot of people in our business who are not excited about the purchase price,” said Donald Yacktman, founder of Austin, Texas-based Yacktman Asset Management, which bought 14.9 million Dell shares last quarter.
Yacktman, whose $9.3 billion Yacktman Fund beat 99 percent of peers over the past five years, said he paid a price “in the single digits.” He declined to say whether he supports the deal.
The agreement provides for a so-called go-shop period of 45 days during which time the company will solicit other potential offers. Michael Dell recused himself from all discussions on the board of directors concerning the deal and from the vote. A special committee handled negotiations with the help of independent financial and legal advisers.
Such steps are necessary to show the board tried to be fair, said Elizabeth Nowicki, a mergers and acquisitions professor at Tulane University Law School in New Orleans.
While it is too early to predict how individual shareholders will react, at least one major owner has previously said Dell is worth significantly more than its current stock price.
Southeastern Asset Management Inc., Dell’s second-largest shareholder, (DELL:US) said at the end of the third quarter of 2012 that the company’s shares in a conservative valuation were probably worth in the “low $20s,” according to a regulatory filing.
Southeastern started buying Dell in the third quarter of 2005 and built its stake to 130.9 million shares by the middle of 2007, when the price ranged from $19.91 to $41.54 a share.
Lee Harper, a Southeastern spokeswoman, declined to comment on the firm’s Dell holdings. Southeastern, which is based in Memphis, Tennessee, had a 7.5 percent stake in the computer maker as of Sept. 30, according to data compiled by Bloomberg.
“Though we were hoping for a higher price, we trust that the Dell board has properly done its job,” William C. Nygren, manager of the $8 billion Oakmark Fund, said in an e-mailed statement. “By recommending that shareholders accept $13.65 it is saying that no better options exist. Should we hear evidence to the contrary, we’ll raise a ruckus.”
The fund and Nygren’s $3.5 billion Oakmark Select Fund held about $250 million of Dell shares as of the end of last year, Terry Badger, a spokesman for Chicago-based Harris Associates LP, the investment adviser to the funds, said in an e-mail.
Other major shareholders, including T. Rowe Price Group (TROW:US) Inc., Dodge & Cox Inc. and Franklin Resources Inc. declined to comment, according to their spokesmen.
After the deal was announced, at least four law firms said they would investigate the transaction. The chances for a lawsuit to succeed are slim, said Erik Gordon, a professor at the University of Michigan Law School.
“There will be lawsuits,” Gordon said. “I can’t remember a going-private deal in which there were not lawsuits.”
In November 2010, J. Crew agreed to be acquired by TPG Capital and Leonard Green & Partners LP in a deal worth about $3 billion. The retailer’s chief executive officer, Millard Drexler, negotiated with the private equity firms.
J. Crew’s Example
A day later a shareholder filed a lawsuit, saying the purchase price was too low. The suit, and others that followed, accused Drexler of using his executive clout to create a sale process that excluded all potential buyers except TPG and Leonard Green, blocking other bidders from making better offers.
In September 2011, J. Crew and the two private-equity firms agreed to pay $16 million to resolve lawsuits over the deal.
Kinder Morgan, the biggest U.S. natural-gas pipeline operator by market value, in May 2006 received a $13.4 billion, or $100-a-share, buyout offer from co-founder Richard Kinder and an investor group that included Goldman Sachs Group Inc. and Carlyle Group LP.
In August of that year, Kinder Morgan, based in Houston, agreed to be sold for $107.50 a share. In between, at least five lawsuits were filed, seeking a higher price.
Bookseller Barnes & Noble Inc. (BKS:US) faced a different problem in August 2009 when it agreed to buy Barnes & Noble College Booksellers Inc. for $596 million from Leonard Riggio, the retailer’s chairman and founder.
An investor lawsuit said that the New York-based company paid too much for the business and that some board members were conflicted by long-term friendships with Riggio. In October 2010 a Delaware judge refused to dismiss the case, saying the process “gives off a fishy smell.”
Riggio in June 2012 agreed to pay $29 million to settle suits that alleged he unfairly rewarded himself and wasted company assets.
The resolutions in these cases -- a payout to plaintiffs and a slightly sweetened offer to shareholders -- are the most common ways such suits are resolved, according to Gordon.
For companies hoping to fend off suits, removing the CEO from the process is critical, said Gordon, because that executive would otherwise be on both sides of the negotiating table.
“You would be asking him to do something that not even the most ethical, saintly person on earth could do,” he said.
To contact the reporter on this story: Charles Stein in Boston at firstname.lastname@example.org
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