Today, Vice Chancellor Laster issued a lengthy 114 page opinion in connection with the appraisal of shares of Dell Inc. The Court of Chancery found that Michael Dell and Silver Lake Partners underpriced their 2013 $24.9 billion buyout of Dell by approximately 22%, such that the fair value of Dell’s stock at the time of the buyout was $17.62 per share, not the original price of $13.75. The decision can be found here: In re: Appraisal of Dell Inc., C.A. No. 9322-VCL (Del. Ch. May 31, 2016).
Notably, the opinion is largely dedicated to explaining why deal price is not a fair value indicator, especially in a management-led buyout. The Court opined that the Dell buyout took advantage of a fall in the company’s stock price, and its board failed to determine the intrinsic value before negotiating. According to the Vice Chancellor:
Taken as a whole, the foregoing evidence, along with other evidence in the record, establishes that the Original Merger Consideration was dictated by what a financial sponsor could pay and still generate outsized returns. This fact is a strong indication that the Original Merger Consideration undervalued the Company as a going concern.
As explained by the Vice Chancellor, the optimal time to take a company private is “after it has made significant long-term investments, but before those investments have started to pay off and market participants have begun to incorporate those benefits into the price of the Company‘s stock.” An appraisal proceeding “can and should address the problem of opportunistic timing”.
The opinion also discussed the “valuation gap between the market‘s perception and the Company‘s operative reality.” Described as a so-called “anti-bubble”, such gap is driven by “(i) analysts’ focus on short-term, quarter-by-quarter results and (ii) the Company‘s nearly $14 billion investment in its transformation, which had not yet begun to generate the anticipated results.”
In sum, the In re: Appraisal of Dell Inc. opinion highlights the fact that the Court did not give weight to the final merger consideration, but rather relied exclusively on the discounted cash flow methodology to determine the fair value of the Company.