Takeovers: Ding Dong Dell

What the bidding war for Dell says about animal spirits in America.
Economist StaffMarch 29, 2013

Last month Michael Dell offered to take private the computer firm he founded. It could cost him his job. On March 25th a subcommittee of Dell’s board concluded that two rival bids might prove better than the $13.65 a share that Mr. Dell is offering.

The battle could drag on. The new bidders, Carl Icahn, a billionaire activist investor, and Blackstone, a private-equity firm, have yet to secure the financial backing they need. Mr. Dell and his partners, Silver Lake, another private-equity firm, may raise their offer. Mr. Icahn may be more interested in winning a good price for his existing $1 billion stake in Dell, rather than acquiring the firm. Blackstone seems to think it can squeeze more value out of the company than its founder can, perhaps by selling its financial-services arm.

Are animal spirits returning to American capitalism? The surge in share prices, at least until the euro zone started to worry markets again, has led to a wave of mergers and an upward revision of corporate valuations across the board. Buyers have plenty of cash to spend. Borrowing may be as easy as it was in the summer of 2007, just before the credit bubble burst.

Companies sitting on piles of cash are now targets. Bidders see an opportunity to raise the value of a target by giving its cash to shareholders. Before offering to buy Dell, Mr. Icahn wanted the firm to pay a special dividend of $16 billion (from cash reserves and fresh debt), though the suggestion did not form part of his bid, as he perhaps thinks he can do more with the cash as the firm’s owner.

Leading private-equity firms are now in their best shape since 2007. Blackstone, which went public weeks before the market froze, recently enjoyed its highest share price since early 2008. Shares in Kohlberg Kravis Roberts (KKR), another private-equity giant, recently hit an all-time high.

Back in 1988 KKR broke up an attempt by the boss of RJR Nabisco to take the firm private. That battle won KKR the sobriquet “Barbarians at the Gate”. Now, a contested auction when a boss tries to take his firm private is regarded as the epitome of good corporate governance, to ensure that shareholders get a fair price. Mr. Dell’s offer for his company triggered a “go shop” period during which the board was open to rival bids. Mr. Dell, rightly, was not permitted to sit on the board subcommittee that evaluated the rival offers.

The “go shop” came partly at the behest of institutional shareholders who thought Mr. Dell’s offer too low. Some are believed to want to retain an equity stake in Dell because they think its value will rise. Strikingly, in their offers, both Mr. Icahn and Blackstone include an option for some Dell shares to remain publicly traded.

A recent study of private-equity deals by René Stulz of Ohio State University and three colleagues from the University of Pittsburgh looked at cases where bosses took their company private and stayed on. It found that existing shareholders did well out of such deals because, the authors reckoned, the boss had a better idea of the likely upside of escaping the short-term pressures of the stockmarket, and was willing to pay for it.

When KKR bought RJR Nabisco, it paid too much and lost a fortune. Will the victor in the battle for Dell suffer the same fate? For Mr. Dell, any winner’s curse from overpaying would be softened by avoiding the loser’s curse of losing his job. So he will probably pay what it takes to win.

© The Economist Newspaper Limited, London (March 30, 2013)                                                                                                                                                                              

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