This logic is terrible. The share holders would have never gotten $17.62 so why are they being awarded $3.87 per share with interest?!
Reminds me of the land taxes on the value of the property. The value of the area goes up, the house is taxed into a higher bracket because it is worth such and such. But no one will buy it for that appraisal so how can it have that value?!
Or collecting comics or coins. My comic book is valued at $1000! Great, but no one will buy it for that much. I only get $500 offers for it. Things are only worth what they are actually exchanged for.
As Dell's vision was realized, the market price would have reflected the increase in value.
This means the more disturbing part is that the judge has had 3 years of hindsight where parts of Dell's plan have been realized, making it appear as though they were inevitable when at the time it was still highly uncertain (as reflected in the stock price). If Dell, Inc was now in the shitter he wouldn't be awarding $3.87 / share, that's for sure.
The baffling part to me is that he found Dell (the person) and the board conducted themselves ethically during the buyout, yet still found in favor of the plaintiffs. The rule of thumb with management-led buyouts is that the shareholders are getting screwed. If he wasn't hiding information, and wasn't strong-arming the board into approving his offer / not soliciting other offers, then the accepted offer should stand.
I am surprised at the amount of misinformation in this thread (have people actually even read the post? It answers most of these questions!).
> This means the more disturbing part is that the judge has had 3 years of hindsight where parts of Dell's plan have been realized, making it appear as though they were inevitable when at the time it was still highly uncertain (as reflected in the stock price). If Dell, Inc was now in the shitter he wouldn't be awarding $3.87 / share, that's for sure.
That's not what the judge was ruling on, and it's not cited in his decision explaining the numbers (agree with him or not, his reasons are compelling for how he arrived at the numbers). The ruling is that at the time of the take-private, Silverlake must have valued the company at his price - the highest price - because if not, the purchase would not have offered a compelling return for a private equity investor. What's happened in the last three years did not enter the equation.
When you do valuations you must take risk into account, and with the benefit of hindsight it is far too easy to imagine that 3 years ago the future as it played out was more inevitable than it actually appeared at the time.
Hindsight bias is usually unconscious, so its unsurprising that it is not cited in the ruling.
Your last sentence suggests that every acquisition is a swindling of shareholders, but again, you are not taking risk into account, and perhaps the judge did not either. Most professional investors do not adequately adjust for risk, so why would I expect a judge to?
I am not offering an opinion on the matter, so I don't know what you mean by me not taking into account risk. You were inferring things from the judge's verdict that were not correct and I was merely pointing them out.
I don't know why you are trying to make this point about adjusting for risk when the entire question revolves around what the stock was worth at a stationary point in time three years ago. There is no risk basis to the calculation as discussed here - it's not a question of the judge possibly taking it into account or not, the judge absolutely did not factor it in. Whatever has happened in the world in the ensuing three years would not have affected this lawsuit either way.
> I don't know why you are trying to make this point about adjusting for risk when the entire question revolves around what the stock was worth at a stationary point in time three years ago.
That you don't see how these two are connected is my point.
Let me take a step back. The value of a company is the sum of the cash that can be taken out of the business in perpetuity discounted back to present value.
A common mistake is thinking that you can nail this down to a precise figure. In fact, it is a range of potential values. Why? Because the future is uncertain, and those future cash flows are uncertain. In other words, there is risk involved. So in the optimistic scenario where everything in the business goes right, you get a high valuation. In a pessimistic scenario the valuation is lower. Which is correct? Nobody can tell from the outset.
Now imagine you are doing a valuation for a business, but for the value of that business 3 years ago. You have had the advantage of seeing the trend those cash flows have taken the past 3 years, and whether you admit it to yourself or not, it will influence your valuation. That is all I am saying.
> You have had the advantage of seeing the trend those cash flows have taken the past 3 years...
And what exactly are those trends? Dell has been private for three years, how the company is doing is not and has not been public since the deal closed. I see how they're connected and I understand your point in aggregate, but it's 1) not relevant in the first place and 2) even if it were, the positive economic picture you're painting isn't even apparent - Dell could be a disaster right now and nobody would know (and the judge still would have ruled similarly.)
I find it interesting in general how people, after seeing a one-sided video or article or whatever, wonder "how can X be so irrational and stupid"?
X can be a judge, a politician, etc. This is often followed by something about conspiracy or incompetence by simple selection. But still, people rarely think about what really went on in the head of the X. They just like to strawman X and reshare the narrative.
It often turns out (at least 50% of the time) that there is more to the story and X's decision process is actually reasonable given all the facts they has to deal with.
But I am impressed by why people have a tendency to ignore that.
I guess in a meta way, my own comment engaged in the same thinking to some extent, about commenters.
I will say one more thing though: the # of comments a political item gets indicates how controversial it is, while the # of shares it gets indicates how many people agree. Horizontal vs Vertical measures. Anyone write about this?
In a judicial system, the decision maker should document the facts and reasoning that were considered to arrive at the conclusion.... some of it is included in the article ....
I think that number was reached by trying to figure out how much value the shareholders would have had if they'd held on (for a long time) and eventually sold after the current plans had come to fruition.
The flaw in the logic is likely in that it de-valuates the risk associated with holding on to the shares, particularly in a short term focused market. Also, that over time business strategy and direction change. Finally if they thought the price was too low why did they sell in the first place?
Actually, the judge did it pretty much entirely opposite what you're saying. The judge chose the final number largely because he ruled that Silverlake, the private equity portion of the deal, would need to make 20-30% to justify the price of the deal, hence Silverlake's purchase at the lower number actually justified, to him, proof of the price he chose. If Dell wasn't actually worth a 20-30% premium from their purchase price, Silverlake wouldn't have done the deal is the theory. (There are of course issues with this, but this is the logic used.)
If you're an existing shareholder when a company goes private, you're forced to sell at a set price. That's why it's a legal issue. That forced sale is not a free market transaction.
If you look at the history of leveraged buyouts ("private equity" is usually powered by borrowing against the company's assets, not a pure cash transaction), the existing stockholders generally lose.
65% of Dell shareholders voted for the deal, in what seemed to be a fair process. (Michael Dell wasn't allowed to vote his own shares, and non-voters counted as voting against.) Any time people vote someone is "forced" to accept an option they voted against, but the process can still be fair. If equity holders usually get screwed by leveraged buyouts then they should start voting against them.
I agree with the author that having a judge determine the correct price seems perverse.
This came up in the wherein discussion. Should it be legal for 50%+ to see over the rest? Should minority owners have any other recourse?
I get that this isn't a democratic government where we have to guarantee full protection under the law for an individual but what I'd the 51% decides the sale price should be 1picodollar per share and then the new owner awards the 51% with shares effectively giving back their ownership? I imagine this won't happen in real life but just as a thought experiment... should it be OK?
This is not just a reply to you, but to everyone who is making a similar point: if you own a minority share in a company, you should realize that you can rarely call the tune. There are a great many issues in the running of a company that you are not entitled to dictate, and this is one of them. What is the better alternative to '50%+ seeing over the rest'? <50% seeing over the rest? If so, which minority?
Furthermore, even a passing acquaintance with human nature should lead you to the conclusion that people will routinely claim they are being screwed even when they are not.
No, I don't your example is OK. I don't know what law it violates, but I doubt it would be allowed. And there are many real world examples where management acquired a company cheaply because they hid the true value of the company, or didn't pursue competing offers. Acquisition by management is super conflicted and should receive a lot of scrutiny.
However, according to the article the judge thought the process was fair, that there was no way to sell the company for a higher price, and shareholders voted for the deal while possessing all relevant information. I think that given those facts the deal price should be considered fair.
Boy, that's certainly a can of worms. Is someone who builds up a great company with low equity, then intentionally runs it badly to lower the share price, acquires more shares, and then runs it well again, guilty of something? Or is that just how incentives work—they felt like they needed more investment in the business before they could give their all to it?
This is why picking stocks is more difficult than looking at a PE ratio.
Does the board of directors contain competent and trustworthy people? Does an activist investor wield outsize influence? Are buyout rumors circulating?
Hard to know these things, that's a big part of why index funds are so popular.
My above comment is incomplete when it comes to this point; that implication is not actually the case here.
Normally this is in fact not the case, because the acquirer has some sort of strategic reason behind their purchase that they believe will boost the value of the asset aside from simply operating the company as it had planned on doing prior to the acquisition. For instance, Silverlake/Dell is in the process of buying EMC - Dell/Silverlake believe that strategically, a combined Dell/EMC (or "Dell Technologies") is worth more than both companies on their own - but it's Silverlake/Dell/bond holder's cash that will make this happen. Therefor it's not realistic for current EMC shareholders to simply claim the value of EMC should be higher on its own because the purchase relies on operating synergies between Dell and EMC.
The Dell buyout by Silverlake is completely different, because throughout the sales process, it was clear that Michael Dell and Silverlake were not going to do anything to alter Dell's operational plan - that is, everything that Michael Dell and Silverlake were going to do to the company while private is pretty much exactly what the plan was had Dell remained public. So the judge decided to rule that Silverlake must have valued Dell at approximately what he ruled them to be. The case would be very different if Michael Dell/Silverlake were taking the company private and making major strategic changes to its businesses (shareholders could still sue, but the line of reasoning from the judge would be different).
If not overturned on appeal it could set an interesting precedent to argue that in court for all other private equity buyouts that have ever taken place.
I don't understand all the rules at play here, but from a fairness standpoint, you shouldn't be forced to sell. That is the real problem as I see it. At least people forced to sell here got some money to kind of even things out.
Can someone enlighten me here? What is the reasoning for allowing people to buy from people who don't want to sell?
Think of it more as a hard asset rather than as voting rights in a company:
Through one reason or another, you and I both own portions of a house. I own 95% of it, and you own 5%.
I want to sell, because I would like to have the money. You believe if we wait a year we will make more money. Is it fair that your very much minority position could prevent me from selling my much larger stake? It's a house so chances are we can't sell it piecemeal (which is unlike stock of a company, but very similar to going private as a company!)
Except you point of the very problem with your argument. Stocks are liquid as small percentages of the company. It is quite possible for a single individual/organization to accumulate the vast majority of the shares/control of a company without forcing anyone to sell.
I've been through this a few times with stocks I've held, and rarely am I happy about the outcome. For example about 10 years ago I saw something that apparently no one else on wall street saw, so I purchased a number of shares in three competing companies in proportion to how well I saw them profiting over the next 5-10 years. It wasn't 6 months later that Warren Buffet announced he was buying the company I had bet on the heaviest.
Lets just say that I'm still sore about it 10 years later. I even checked the, "I want my stock converted to BRK/A" but they ignored it, because I was going to have too small a fraction of a single share of BRK (which would have been amusing by itself). Heck, in the 10 years since BRK/A has again doubled.
So, IMHO, its just another case of the market being rigged for the big investors.
Without speaking on the GP's behalf, perhaps the leverage in a particular strategy represented by investing directly in the company made the risk worthwhile whereas the more diversified, risk-averse but lower-leverage investment represented by BRK/B was not?
Yah, basically, what I did was buy more of the competing companies, even though I didn't think they were as as well positioned. Turned out to be a fine investment, better than the BRK would have been.
There is no right answer- it depends on how the company was set up, which in turn reflects the type of company it's founders wanted it to be.
We changed our company constitution for this exact reason. We felt that it was important that the majority owner could present an empowered, decision making face to the outside world, rather than having to start any discussion with"I'm here to talk, but I need to run anything past all the other owners".
This does impact on the rights of the minority owners - a 2% owner can't hold up or influence an acquisition for example - but the upside is that their shares are worth more than if the company was controlled by a squabbling rabble.
Having gone from a majority owner to a minority one, I still feel this was the right move for us.
There are two main ways to force existing shareholders to sell:
1. You buy 51% of the shares (and voting rights), make an offer to buy the remaining 49% and call for a shareholder meeting to vote on the offer. You have the majority, vote yes, and acquire the company.
2. You acquire 90% of the shares. You don't even have to call for a shareholders vote; you can acquire the company immediately and squeeze out existing shareholders who are forced to sell and the offer price.
You can either acquire shares by submitting a tender offer (offering to buy shares at a specified price from shareholders) or tapping the public markets (and disclose it). If you think about this a bit more, you'll see there are ways to game the system by, for example, buying enough rights then making a low-ball offer but most of the loopholes are well covered by corporate law.
To address your complaint on fairness, yes, you can be forced to sell because if most of the shareholders want to take the company private, it would seem fair from the majority's standpoint to accept its rule. Not perfect but I don't think there exists a better mechanism.
>To address your complaint on fairness, yes, you can be forced to sell because if most of the shareholders want to take the company private, it would seem fair from the majority's standpoint to accept its rule. Not perfect but I don't think there exists a better mechanism.
Why not just allow the option to let the company go private but let these stockholders retain their minority holding? If you, like the PE firm, think the company is undervalued by at least 20-30% why can't you just retain ownership through the deal and receive your proportion of dividends?
It's a good observation. Private companies with more than 500 shareholders have to obey a different sets of rule from those with fewer owners and must disclose financial performance in a way similar to that of public companies. Most of the time, you'd except to have more than 500 small shareholders that won't willingly sell.
That is the greatest rebuttal of all time. There's no way I'm going to read that page so, instead, I'll just thank you for your diligence and be on my way.
Not so fast on #1 and #2. You're required to inform the company and the public if you're gathering up a high number of shares, and you need to declare an intent for hostile takeover, and there are rules around that.
You can't simply start accumulating shares silently on the public markets and then suddenly declare one day "I own 51% shares and now all your shares are worth 1 cent each muahahah!!!"
As maxerickson said, this possibility should be covered in the shareholder agreement. For that reason, any shareholder is already responsible for factoring in the risk of a buyout-by-vote when they buy shares. They were already responsible for making their own decisions as to "fairness" of that agreement. No information was hidden before the buyout, according to the article, so no "evening out" should be necessary, as far as I can tell.
> this possibility should be covered in the shareholder agreement.
1. It's a statutory right, so it doesn't need to be and generally isn't covered in shareholder agreements: By law in Delaware (where Dell was incorporated) and probably most other U.S. jurisdictions, minority shareholders who don't vote for a buy-out, and don't otherwise consent to it, can't stop the buy-out from going through, but they have the right to demand a judicial appraisal of the "true" value of their shares. [0] [1]
2. Also, public companies normally don't even have shareholder agreements among all shareholders. The articles of incorporation and the bylaws are probably the closest approximation. In many jurisdictions, the board of directors can unilaterally change the bylaws without shareholder approval. (Shareholder approval is often required for changes to the articles of incorporation, though.)
And the buyer should have priced in (and probably did price in) the risk that this sort of thing can happen. I mean, this is not the first time this is happening. It's not like anyone hid the fact that minority shareholders who objected to the sale and met certain conditions could receive more money after going to court.
Buyers are often only interested in buying 100% of a company. If an all or none bid comes in, either the people who want to accept or the people who want to reject are going to be unhappy. When setting up a company you have to plan how to deal with this possibility in advance, without knowing the specifics of any offer. Most large public companies come to the conclusion that letting the majority decide is the fairest thing to do, and most shareholders know that's how it works when they are buying the shares.
If it's in the agreement, how can they have a leg to stand on? They agreed to such a thing!
When you're forced to sell at whatever price, you lose any claim on the future price of the stock.
If a court can give you more money later, then you effectively weren't really forced to sell the stock. You retained some sort of "ghost ownership" with an entitlement attached.
Thus, effectively, the provisions of the shareholder agreement which have to do with this are disregarded.
As someone in a sibling comment posted, there is a statutory right in Delaware (where Dell was incorporated) allowing shareholders who don't vote for a buy out to demand judicial appraisal for the 'true' value of their shares.
>from a fairness standpoint, you shouldn't be forced to sell
This is absurd. If you don't wish to be outvoted in the sale of a public company, then don't buy shares in a public company. This is the deal you agreed to when you bought in. As a minority shareholder, you don't get veto power. You cannot unilaterally block a sale any more than you can unilaterally evict the board.
Nor should you be able to. As unfair as it may seem that someone else can force you to sell[1], it's just as unfair for you to be able to destroy other shareholders' value by blocking a sale.
[1] It's actually not true that you are forced to sale. Just as if you own part of a house and the other party wants to sell, you have the option to buy instead. You can pony up the cash to buy the house at market value, and your can do the same and buy the whole company. Can't afford that? Tough. You don't get to deprive other stockholders by torpedoing the same.
It isn't realistic with stocks. Are you really going to go get 100% consent from every single person that has stock in company? Even the people that only hold 100 shares (or 1 share for that matter)? You would never be able take publicly traded company and make it private this way.
I don't think that's really a bad thing. If it's failing then the stock holders get nothing and assets get put on the market. If some piece is worth more then you can just sell that off. But, if company is public and profitable then what's the upside for society?
If a company is failing or doing poorly in the stock market, sometimes a private buyout allows them to back off the quarter-to-quarter demands or to incur debt needed for expansion/R&D/acquisition etc. this freedom can enable a company to turn around, grow, etc - that's better for society than having it flounder for a few more years while bleeding...:
Agreed. I am sitting here baffled hoping someone with a finance background comments and explains why this makes sense.
Wouldn't this ruling mean that going forward private equity companies will pay even less for companies, building into the price that somewhere along the way they will get sued and have to pony up some more?
The argument is that some people were compelled to sell at this low price, and a fair price (the nearly-$18 number) is about what would have persuaded them to sell. All the high-sounding ideas about making arguments by offering to buy ignores the fact that this wasn't a market deal: small shareholders were compelled to sell whether they wanted to or not, and the board had a fiduciary interest to them.
There's plenty of bad decisions that a majority of shareholders can make, that a minority of the shareholders would be against, and which would decrease the value of the shares. But the whole points of shares in the first place is that one share is one vote, and if you want a larger say in the running of the company, you have to put up they money.
One risk when investing in a public company is every other shareholder, and in this case a majority of the shareholders voted to agree to the buyout price. Tough cookie for the minority holders who opposed it, but why shouldn't they bend to the will of the majority? Why should they be rewarded after the fact?
The precedence seems terrible to me, because as a shareholder in a future case like this, it is clearly beneficial to accept whatever buyout offer is on the table, and the immediately class-action sue the buyer for the difference between that and some fictional "fair" price. What happens if every shareholder does this?
If every shareholder does it, the deal doesn't go through in the first place. The court requires a shareholder to have voted against the deal in order to be a party to the lawsuit.
That seems like it sets up a perverse incentive structure, where shareholders should always vote against deals as long as the downside from the chance that their vote causes the deal not to go through is smaller than the upside from the amount they'd expect to gain from the lawsuit.
It's amusing that several of the issues raised in the recent security analysis of "TheDAO" raised exactly the same issue with their voting structure on Proposals. Namely, game theory showed the best move was to always vote No so long as the No vote wasn't the deciding factor in killing the proposal.
Yes. Many buyouts are immediately followed by a boilerplate class-action lawsuit that the terms were unfair. It's effectively protection-money, as the law firms who specialize in these actions settle in a predictable way, and class action means no shareholder can file a separate lawsuit in re the merger terms.
And this is the comment that makes the whole thing make sense, sort of, to me.
But then if judge's logic becomes the standard, then doesn't that mean you should always vote against the the deal if you think most people will vote for it?
But all shareholders should have factored in the risk of this situation arising when they purchased the shares, should they not have? The risk of a future buyout-by-vote was always present. This scenario, I assume, was covered in the shareholder agreement?
Yes, but the the situation they agreed to was not "majority shareholders can force them to sell for whatever they want. Period." It was that they can be forced to sell, and then they can go to court and say that the price they got was not a fair appraisal of the value of the stock. Now they're arguing that $13.75 was not a fair appraisal of the value of the stock.
Okay, yeah, dctoedt points to the law[1] where this is described. I did not know about this law.
Interesting, though, that the courts' appraisals are trusted over the market in this case. It's sort of like an anti-crowd-dynamics protection, but only for people who vote no. Your decision over whether to vote no is influenced by your knowledge of likelihood for the total vote to succeed, as henrikschroder mentions[2].
Ah - that does make sense. They were looking out for shareholders who didn't have a choice who would have been happy to wait for years to realize their gains.
I think your second point above is right, though. If this reasoning applies to pretty much any LBO, it has to be factored into the price of future LBO offers.
If the standard is a 20% return on investment, then any buyout can be proven to be 20% undervalued, negating all benefit, so you're right, the natural response would be to reduce the bid to make up for that, but now that we have this precedent, we can assume they know about it and have even further undervalued any buyout, so we can prove in court that any stock is actually somewhere around 40% undervalued. But any buyer would anticipate this further proof of devaluation and lower their bid even further, so naturally we're going to approach zero bids on provably infinite value stock.
That's probably not right. Under mild assumptions, each successive update to expectations will be proportionally smaller in magnitude, and the price will converge geometrically to a somewhat lower (but non-zero) number.
It's the same reason why the government spending multiplier isn't infinite, even though government spending spurs private sector spending, and private sector spending increases the tax base.
I was wondering if someone might say something like this! Of course, my statement was meant to be absurd. I was just imagining the arguments of future lawyers explaining how their clients' stocks were infinitely valuable becuase of the assumed profit-seeking behavior and anticipation of lawsuits by investors.
I would be shocked if this did not get reversed upon appeal for that very issue - the precedent that would be set by this would wreck havoc on the market.
The point is that the shareholders bought it believing that it was worth $17.62. They were both willing and capable of holding it until they were proven right. However they were forced to sell for less than they thought it was worth.
To use your comic book example, if you own the comic book, you believe it is worth $1000, and you don't want to sell for a dime less, then it is wrong to force you to sell to someone at $700 just because nobody has yet offered you more than $500. That's theft which can be only made right by returning your comic book or by giving you the price you want.
Property tax is often based on its potential value instead of its current use. Just the possibility that the land could be rezoned in the future could increase your taxes.
That still doesn't make any sense. If the property isn't rezoned in the future, do they go back to previous tax payers and refund them the "excess" taxes? What if the property does better than was anticipated? Do previous tax payers now have to cough up more in arrears?
I was a Dell employee at the time and the consensus feeling at the time was that Michael Dell got the company for very cheap. Just compare the Dell stock price with its closest competitor HP. You'll see that between Dec 2012 and Dec 2013 HPQ doubled its stock price while Dell just went up by the ~35% premium that Michael Dell paid.
The logic only looks terrible until you follow the course of actions, read the arguments, understand the situation, and realize that actually it's a pretty fair and balanced process.
This is exactly the problem with the Chinese real estate market. Realtors conspire to keep property prices rising, refusing to show or list any homes that are priced too low, creating panic with consumers and eventually making those prices "real." It can only last for so long.
Can someone give the devil's advocate view? As others are saying, the judge's ruling is ridiculous. I can understand if there were material misrepresentations that affected the offer price, but to rule that you should offer more than the market was valuing it? Even though no one was actually willing to pay that price? And on the grounds that "investors are too stupid to correctly value it"?
Isn't the whole point of a buyout that you think other investor's are incorrectly valuing a venture based on the available information? If any buyout is going to be subject to this later, with-more-hindsight review that forces buyers to "top up" to the "correct" value, what's the point?
Sometimes I wonder how business manages to work at all in the presence of this "jackpot justice".
The issue is that some shareholders were forced to sell at $13/share even if they didn't want to. There were a minority of shareholders who were holding onto the shares on the assumption that the new long term vision would work out great and expecting their shares to be worth something >$13/share. Those people were forced to sell at $13 because the majority of shareholders agreed to take $13/share and let the company go private. Maybe someone bought at $14 a share years ago and simply was a buy and hold investor living off the dividends and convinced that it was under priced but totally ok with that because they expected to own the company forever. That person would be pissed at the $13/share offer.
This all makes sense as to why they might not have wanted to sell, but doesn't this ruling invalidate the entire reason to vote? Constituents don't get any sort of compensation if their preferred political candidate doesn't win the election, or if a bill passes that they voted against. Why would this be different in the case of a vote for a buyout?
I own 51% of the shares, so have a strict majority of all votes. I call a shareholder meeting and propose to take the company private by selling all the shares to me, for any price I choose. The vote passes by majority.
To prevent the 49% being completely screwed with regularity, the law provides for those who voted against such a takeover to have the sale reviewed by a judge. The 51% owner takes this into account when proposing a price.
In the case of a political election, the losing minority does not have their property instantly and compulsorily purchased at an arbitrary price set by the winner.
Thanks, that makes a lot more sense now. I remember using the reverse of that strategy in Railroad Tycoon 2: if my company had a lot of cash, I'd buy up as many shares of a smaller company as I could, and then make a wildly-over-the-top bid for it to divert my company's money into my pocket!
Interestingly, I think it capped the amount you could offer at something like 2x the current market price, their own version of imposing an "arm's length" restriction...
>In the case of a political election, the losing minority does not have their property instantly and compulsorily purchased at an arbitrary price set by the winner.
Actually, in many poorly-run democracies, they do something very close! I'm reminded of the Dilbert comic: "If you vote for me, I'll take money from the people who didn't, and give it to you!"
Yeah, I was anticipating that response, since that's a cynical description of taxation in general. There are safeguards for that process too, like term limits and multiple branches of government. Let's not have that argument here, though.
Isn't that part of the risk when you invest in equities? If you don't want to be forced to sell (or deal with bankruptcies, etc.) you can always buy bonds or ETFs or other less risky ventures.
Shareholders take that risk against the backdrop knowledge that in situations like this they can seek appraisal from the court. Not that I think such appraisals make all that much sense with publicly-traded equities, but nonetheless these shareholders bought the stock assuming the appraisal right would be available.
Courts of course should always be last resort, after all, there could be fraud (e.g. if the CEO was deliberately hiding some information that would have increased the market price).
But the problem with this ruling is, that it's ridiculous - the court's argument is basically that the "fair value" is above what PE paid because PE wanted to make a profit! It basically contradicts the whole idea of the market (buying something if you think it's worth more than the current price)!
Exactly, you are abandoning market and its prices once you say "those stocks are just pieces of paper now, we'll give you few bucks for each so you won't sue us"
The appraisal right makes sense for smaller companies, even in the absence of fraud. There, you can have a majority shareholder come in and force a minority to sell based on a lowball valuation. There are no competing PE offers or public exchange prices to use as a reference in that scenario, so the appraisal right at least ensures an independent look at the purported valuation.
Yes, but part of the risk of acquiring a company is that shareholders who opposed the sale will get the sale examined by a judge as they are entitled to under Delaware law.
It isn't an inherent risk, because the law allows for you to demand a judicial appraisal for the 'true' value of their shares.
You can say the same to the people buying a public company; there is an inherent risk that you will be forced to pay some shareholders more, so it should be factored in to the price you are willing to pay for the company.
No, but a law that gives you grounds for a lawsuit is grounds for a lawsuit. Shareholders who were forced to sell are entitled by law to have the sale reviewed by a judge.
How can that be "the" issue? That's fundamentally how business equity -- the entire stock market -- works. Certain decisions are put up to a vote of shareholders, one-share-one-vote, and the result binds all shareholders.
It's no more unusual than "forcing" naysayer shareholders to accept the dilution that comes with e.g. a secondary offering.
(Certainly, there are reasons to dispute the prudence of the decision, but that would be orthogonal to your argument, which seems to be about the mere fact of overruling minority dissenters.)
How can anybody be made to to sell a thing that he doesn't want to sell?
I understand government can do it for greater purpose, like building infrastructure but a company?
How can a company say "you know what, these stocks that were issued to represent ownership won't be a thing since next month, we can give you 13 bucks for each so you won't feel like a total looser"?
Suddenly I'm all for judge deciding how much people that were basically sold piece of paper with some meaningless letters should get.
Is there anything wrong with that? Surely that is an known risk when deciding to become a minority shareholder?
What is next? Maybe I can buy Apple stock because I expect them to launch a self driving car next year, and if they then don't focus on self driving cars I can sue because it is not what I expected?
> '...but to rule that you should offer more than the market was valuing it?'
Acquisitions in general are almost always for a premium based on the current market value of the company. Just look at Salesforce/Demandware this morning, with the stock up >50% over where it closed yesterday. As the article states, the current shareholders of the company obviously believe that the company is worth more than the current price - if they didn't, they would have sold their shares. The argument is regarding how much more it was worth, but the practice of it being worth more than it was at the time trading publicly when it comes to a buyout, take-private or acquisition is not in and of itself unusual.
> Even though no one was actually willing to pay that price?
'Nobody' is sort of subjective here. No, nobody that was involved in the take-out process was willing to pay that price. But the lawsuit was brought by shareholders, who very well could have believed that the stock was worth $50, yet had positions as large as they could manage. The judge actually ruled that his price was correct because nobody (in the sales process) would be willing to pay that amount as private equity would need a significant return on its capital (25% in this case).
> Isn't the whole point of a buyout that you think other investor's are incorrectly valuing a venture based on the available information? If any buyout is going to be subject to this later, with-more-hindsight review that forces buyers to "top up" to the "correct" value, what's the point?
The Dell case is unusual because Michael Dell did not make the case for any sort of managerial or strategic shift post-buyout (hell, why would he push for a managerial change as the CEO). Normally in the acquisition/buyout/merger/etc process, there's something materiel that the acquirer wants to change to make the company more valuable. Maybe they want to purchase the company and get rid of all the managers. Maybe they want to purchase the company and achieve cost "synergies" between two or more companies where significant savings could boost sales. Maybe they want to let both companies sell each others products. In this case, Michael Dell didn't want to do anything different from what the current plan for the company had been -- he just wanted to do it in private. So while this decision is wild, it's not one that sets precedents for most acquisitions.
It depends on whether or not it was a 'drag along'. That can make a big difference in how the price is interpreted after the fact. It means you don't exactly get a say in the price at which you sell. Of course it also matters if you were on the record as disagreeing with selling your shares at that price.
Since we are asking questions, hope you don't mind me piggybacking, how does someone decide the amount they are willing to pay in such a transaction? I understand that you pay a premium for controlling interest and for the sheer volume of the stock you are purchasing, but how does one pick the premium amount?
You look at similar past deals which have gone ahead or fallen through.
You sound out some large shareholders, see what they might accept.
You run your own modelling - what you think it's worth, what it will cost to finance the deal. That gives you a cap on what to offer.
Then you use your judgement and make a bid.
After you make your bid, you will get more feedback and can raise the price if necessary.
Well the Devil's advocate view is that Mr. Dell orchestrated the sale to himself without giving the market the knowledge he possessed at the time of the sale. I do not know the details of the case, but Mr. Dell as the CEO of Dell is not a normal buyer, he is someone that has a legal obligation to the shareholders to deliver them maximum value.
The lawyers here would have to prove that Mr. Dell was working in his own interest here, and not in the shareholders' interests.
That's not really the challenge being placed in this case: " The best reply, especially in a conflicted management buyout where the buyer is also the CEO, is often along the lines of "because management deliberately undermined the sales process to prevent other bidders from seeing the company's true value, so they could take it for themselves on the cheap." But that's not really what happened here; the court found that, while there were some inherent conflicts of interest, Dell's independent directors basically did a bang-up job of running the sales process, and even Michael Dell himself -- despite being both the CEO and the prospective buyer of the company -- behaved like a prince. Actually, reading the opinion, you almost get the sense that Michael Dell didn't do this leveraged buyout for the money. It was just an intellectual engagement, a point of principle. He thought the stock was undervalued, and he wanted to argue his case, and the way you argue that is by buying all the stock."
More financial writing should be like this. The various points of view are clearly presented and explained in proper layman terms and it made for very nice reading.
I disagree, and find myself increasingly annoyed with his popularity. I liked his earlier journalism, 1-2 years ago, but as he's become increasingly popular he's become like a John Oliver or Michael Moore of finance.
The formula is the same - take a complex issue, simplify it beyond recognition, and then act outraged that the rest of the world, when considering the entire complexity of the issue, had a range of reactions different from your five-year-old view of things.
It's great entertainment for the masses, but it's a different genre from informative journalism.
He totally failed to mention that all people who owned Dell stock were forced to sell for that price whether they wanted it or not. That made me think that all of the process of deciding the price outside of the market is insane while it's exactly opposite.
This whole article is a little misleading. It makes it sound as if anyone who happened to own Dell stock at the time of the buyout could have sued to get some extra cash.
But only in the footnotes does it mention this:
>To be eligible for the court-ordered price bump, investors must have voted against the transaction.
Clearly, everyone who owned Dell stock at the time thought it was worth more than $9.35. That's why they held the stock in the first place! Those who thought the company was worth much more (say, $18 per share), presumably voted against the transaction. They were understandably pissed when the transaction succeeded anyway, so they sued. But those who voted in favor of the transaction didn't get an extra penny -- they agreed on a price, and that's what they got.
On a related note, here's an interesting game theory tangent: If you think the buyout offer is a great deal, should you vote for it? After all, if you're confident the deal is going to succeed even without your votes, maybe you should vote against it -- to preserve your option to sue for even more money. But if everyone thinks like that, then the deal won't go through at all...
Vice Chancellor Lester quotes in an opinion from 2014[1]:
[S]elf-interest concentrates the mind, and people who must back their beliefs with their purses are more likely to assess the value of the judgment accurately than are people who simply seek to make an argument. Astute investors survive in competition; those who do not understand the value of assets are pushed aside. There is no similar process of natural selection among expert witnesses and [] judges
And
―The benefit of the active market for UFG as an entity that the sales process generated is that several buyers with a profit motive were able to assess these factors for themselves and to use those assessments to make bids with actual money behind them. For me (as a law-trained judge) to second-guess the price that resulted from that process involves an exercise in hubris and, at best, reasoned guess-work.
Apparently this Laster guy has been an tough judge for cases like this over the past few years, and has spoken out against this before:
From the article (in reference to shutting down a suit against Aruba for selling too cheaply to Hewlett Packard)
"It wasn’t a first for Mr. Laster, long the court’s firebrand. In his six years on the bench, he has made weeding out weak cases something of a pet issue. But “this time feels different,” said Ed Micheletti of Skadden, Arps, Slate, Meagher & Flom LLP, in part because Mr. Laster’s colleagues are joining him."
It seems that in this case he felt that the price discovery mechanism of the process and go-shop wasn't sufficient to reach the theoretically "correct" price, which makes sense. The reason any market approaches efficiency is because investors can easily buy and sell undervalued or overvalued securities. In massive transactions of this sort, there are only a handful of buyers who can participate, and it would be unreasonable for such a situation to be as efficient in price discovery as a liquid, publicly traded market.
My sense is that the issue is more with the law, and ability to challenge this sort of thing (which is mostly capitalized on by specialized hedge funds who buy shares and sue) holds a transaction to a different standard than when it actually occurred. Specifically - the board, representing the fiduciary interests of shareholders, should be expected to make a reasonable effort to get the best price. If markets are not efficient and no one has the capital to step up and make a purchase, how would they know that? You can never prove the counterfactual in that type of situation, and it seems dangerous to attempt to do so via ex-ante analytical modeling.[1]
1. I get that this concept is widespread in settlements of all sorts (loss of use, damages, etc.), but in this case, no one was defrauded or coerced. Shareholder agreements were obeyed, and that should be that.
Well said. It reminds me of all the bluster I hear from people about how they are "100% sure" that "FB is definitely overvalued at $80B" or "AMD is certainly undervalued at $5B" and yet, they never seem to back up their certainty with the actual act of buying or shorting the stock in question. When it comes to financial markets, anyone who doesn't put their money where their mouth is, should be completely and utterly ignored.
>yet, they never seem to back up their certainty with the actual act of buying or shorting the stock in question
Most of the vehemence is in regards to privately held companies which can't directly be shorted. In fact, that may actually contribute to the odds of the company being overvalued.
I strongly agree in general, but there are risks to acting on your urge even if you turn out to be right:
> is definitely overvalued at $80B"
Stocks move in bizarre ways, particularly tech stocks. If you short a stock and time it wrong, you can easily be right about the fundamentals but get killed by the herd in the meantime.
Going long is safer, but can still be bad. If the price drops below your buy-in, and a merger is agreed at the low price, you can be forced to sell low. You could have bought into Dell, and then been forced to sell lower than your own valuation.
It sounds like these people did put their money where their mouth was. They owned the stock.
If you think the market is over-valuing a stock you hold, you sell it. If you think it's worth more, then you keep it, and refuse any offers to purchase it for less than you think it's worth.
These people tried to refuse the offer. As mentioned in the footnotes, only those who voted against the deal were entitled to sue for compensation.
I somewhat agree with you. My comment is more to the general point of people who don't buy/short any shares at all, and not specifically to people being forced to sell during buyouts.
Most of the people I've met who talk about how "FB is definitely overvalued" do have some amount of capital. They could safely short FB with X% of their portfolio if they are really so sure, and yet, they never do so.
Just to put this into perspective, only a relatively small number of people are eligible to receive the higher price: they must have voted against the buyout and jumped through some other hoops that indicate they were against the lower price. (They were forced to sell and presumably wouldn't have otherwise sold without a higher price.)
Doesn't this create some sort of prisoner's dilemma situation, in which it's in the best interest of each individual shareholder to vote no to a buyout, hoping that a majority votes yes, but if a majority votes no, noone gets anything above market price.
If you look at this as a one-shot game, sure, but it's not. If everyone votes no the buyout would be rejected and the prospective buyers would have to offer a higher price to get it approved.
The tricky thing is that shareholder voters exhibit very weird and irrational behavior (due to proxies, lobbying, the T Rowe Price craziness, etc.), so I'm not sure game theory is terribly useful to begin with here.
Only if you think the company is actually worth more. If you think it's worth less and the buyers are suckers, then you'd want to vote yes so you can get extra money before reality sets in. Which is to say, your incentives for voting line up with whether you think the buyout is a good deal.
I upvoted you, but there's still some possibility of perverse incentives. Let's say I am a stockholder, and I think the sale is a good one - these buyers are suckers! But I also recognize that most of the other shareholders feel the same. So, to hedge my bet, I vote "no" so that if it turns out the buyers were not suckers, I can sue.
My scenario is that I vote "no" even though I think selling is the right decision. I feel I can do this because I recognize my vote will likely not prevent the outcome I want, and it insulates me against the risk that I, and others, are wrong.
That is just bizarre. So if you buy out a company where no other group even tries to outbid you investors can later come back and claim you did pay a fair market value?
Has this happened with other buyouts or mergers? I thought the point of the share price was to show what investors were willing to pay. To assume every buyout is purposefully under cutting the price by 25% will just depress future offers
IANAL but you can search through the Delaware court system website[1] with the text "appraisal" and find plenty of examples of this sort of lawsuit, which I understand is very common (perhaps to the degree that every buyout gets challenged by shareholders who voted against the buyout).
That wasn't my takeaway. The implication of the title, in the context of the article, is that the suit would have had less merit if the sale price had been higher.
At first I thought this was silly, but when you're negotiating a complete buyout, it can be tricky: What if you really really didn't want to sell the stock at the price, maybe you had just yourself identified it as a value deal (hard to prove), and felt coerced into the buyout for a value that didn't, say, recouperate the expected gain. What if you had an outstanding sell order at $20 (unlikely, but easy to prove). In theory, what one should be doing is to drill down the ask chain until all of the outstanding asks are fulfilled. But that's not really possible either.
The given example - $10 v. $20 so you pay $12 - is an example of the principle of consumer surplus. Not the EMH.
"The efficient markets hypothesis" is not precisely the same as "consumer surplus". The EMH is dependent on consumer surplus, but the EMH could be wrong and consumer surplus would still not be.
Consumer surplus is a microeconomics concept; the EMH is macro.
This error isn't critical to the rest of the article, but it's jarring to see something like that in the first few paragraphs.
True, but the concept of consumer surplus fundamentally changes in financial markets, in which both parties want the same thing -- more money. In most markets, people want different things, so it's understandable for both parties to be better off, since each value's the other's stuff more. Nothing funny about Alice valuing Bob's widget more than her wadget, and vice versa.
But when both parties want "the thing that throws off the most money", it's a lot harder to come up with a scenario in which (reflectively consistent) preference sets allow for a range of possible sale/purchase values.
IOW, it's fine for a worker to be (hypothetically) willing to take a lower-than-market value for their labor ... but if a financial seller is, then there's (probably) a misvaluation somewhere, and thus an EMH violation.
The only reason I ... tolerate markets ( and I tolerate them quite well ) is that they act as a price discovery mechanism, a way of constructing decision trees using dynamic information. I have enough bandwidth to understand that basic trade - someone selling vegetables on the side of the road - is a win-win. Beyond that? I dunno. Hypothetically, Bob and Alice are specialized to each widget, which makes them more efficient.
If we cannot come up with a preference-relation in which a range of possible sale/purchase values is allowed, then we can't really even hoist consumer surplus into use to support the EMH, can we? Isn't it at its core now a phony, game-playing exercise? There's no there there; it's curve-fitting nonsense on stilts at best.
Self-referential systems are known to be deep pools of unmanageable complexity. And M&A seems to be a widely ignored disaster.
I suspect - but really lack the chops to prove - that Adam Smith had it right all along, but that humans will always revert to isolated pools of mercantilist rent-seeking. That "markets" require beings who do not exist, or who have managed to get just enough ethical boilerplate to avoid the rent seeking. Just as Progressivism requires philosopher kings, so do ( apparently ) markets. So we're down to "well, it keeps the people who might otherwise be violent busy."
When asked about American democracy, Ghandi said "I think it would be a good idea." I think capitalism would be just such a good idea.
ObDisclosure: I have an old Usenet contact who is quite wealthy from a hedge fund. This guy's a PhD in applied math. He reports "I refute the EMH thusly" by kicking the logo of his firm.
EMH is probably undecidable given like what you said "Self-referential systems are known to be deep pools of unmanageable complexity." An entangled web of horrible horribly reactive code/systems that percolate from some perverted sense of fundamentals to the furthest farthest markets an "efficient price." Knowing what we know about "markets" and the implementation of these markets, HFT, market makers, and the clusterfuck that is all the "financial" industry that tries to capitalize on little tiny arbitrage amounts..Yeah, the markets efficient, if efficient is a synonym for reactively retarded. The market is an elephant with the tail of a donkey that has nerves that propagate at the speed of light. Efficiency really doesn't mean much if the quality of the information that is efficiently transferred is between a retarded chameleon and a groundhog with a bad hair day. But as long as everyone agrees its an elephant and believes the myth that elephant prices make sense...
It seems much easier to convince a court of a high stock price than it does an entire market. Therefore, sell at the price offered and spend your time on convincing the court, later.
What this article does not explain is who is entitled to the money. It just says those who have jumped through hoops. I owned dell stock and it was sold without my consent, am I also entitled to the increased amount?
Reminds me of the land taxes on the value of the property. The value of the area goes up, the house is taxed into a higher bracket because it is worth such and such. But no one will buy it for that appraisal so how can it have that value?!
Or collecting comics or coins. My comic book is valued at $1000! Great, but no one will buy it for that much. I only get $500 offers for it. Things are only worth what they are actually exchanged for.