M&A

Judge Says Dell Founder Underpaid for Buyout

A Delaware Chancery Court Judge says Dell shares were worth 22% more than what Michael Dell and Silver Lake Partners paid for them.
Matthew HellerMay 31, 2016
Judge Says Dell Founder Underpaid for Buyout

Three years after Michael Dell and a private-equity partner took Dell Inc. private for $24 billion, a judge has ruled they may have to pay shareholders significantly more money.

In a victory for investors who sued for an appraisal of Dell’s shares, Delaware Chancery Court Vice-Chancellor Travis Laster said Tuesday the stock was worth $17.62 at the time of the buyout, 28% more than the $13.75 paid by Dell and Silver Lake.

According to the Financial Times, the ruling could cost the buyers about $20 million as about 5.2 million shares are still eligible for appraisal. Magnetar Capital, a hedge fund, has legal rights to about 3.8 million eligible shares.

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“The sale process functioned imperfectly as a price discovery tool, both during the pre-signing and post-signing phases,” Laster wrote, adding that “sufficient pricing anomalies and disincentives to bid existed to create the possibility that the sale process permitted an undervaluation of several dollars per share.”

As Reuters reports, appraisal “has become a popular way for specialized investment funds to squeeze added cash out of merger deals.” Forty-three appraisal suits were brought in the Delaware court in 2015, representing a record $2.3 trillion in face value, according to The Wall Street Journal.

At the time, the Dell deal was the largest buyout since the global financial meltdown. “In the wake of the financial crisis, Dell’s PC sales had slipped, causing share prices to fall — and presenting Mr. Dell with an opportunity,” the FT noted.

But opposition from shareholders including billionaire Carl Icahn forced the company’s founder and Silver Lake to delay the shareholder vote three times, and twice sweeten their offer. After the deal passed, scores of investors who voted against it sued in Delaware, with some claiming a fair value was as high as $25 per share.

Judge Laster’s ruling “is a black eye for Mr. Dell and Silver Lake,” the FT said.

The buyers, however, caught a major break when Laster ruled earlier that T. Rowe Price’s shares were ineligible. If not for that decision, the fund could have claimed more than $100 million.

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