MBO or MOB – Is There Really a Difference?

I don’t typically discuss specific companies, but sometimes corporate events allow me to think about bigger issues.  Today, I want to talk about Dell – because it allows me to discuss something that I’ve always been opposed to – management buyouts (MBOs).  I don’t think it’s a coincidence that MBO is just a letter switch away from MOB – because in an MBO, management tries to “make you an offer you can’t refuse.”  We prosecute mobsters, yet somehow management is allowed to do worse.

Imagine that I am the founder and CEO of a company.  You invest in my company.  You risk your capital.  You trust me to run the company for your benefit.  I am your agent.  Then, I come to you and I tell you, “I’ve got great news.  We’ve received an offer from some people who want to buy the company.”  As a shareholder, you respond, “that’s great…who is interested?”  I respond, “me and my friends.”

How do you feel at that point?  Didn’t you hire me to maximize the value of this company for you?  Why is the company worth more to me?  How will the company be worth more if I squeeze you out and own the company with my friends?

Ultimately, this is what Dell is doing.  I’ve always thought MBOs were outrageous and this deal is no different.  Fortunately, there are some large, sophisticated investors and they appear ready to fight back.  I hope they’re successful.

I’ve read through Dell’s 8-K about this deal.  I want to share a few of my favorites from it:

1. Dell says, “The price represents a premium of 25 percent over Dell’s closing share price of $10.88 on January 11, 2013, the last trading day before rumors of a possible going-private transaction were first published.”

Of course, what Dell didn’t say is that “the $13.65 price is 24% less than the $18 price that the stock sold for less than one year ago.”

2. Dell says, “The independent directors of the board have concluded that the proposed all-cash transaction offers an attractive and immediate premium for stockholders.”

Of course, not all investors have risked their capital with the hope of a “quick pop”.  Many were buying this company as a long-term investment because they believed that it was undervalued.

3. Here’s my question for Dell.  If another buyer had approached Dell and had offered them $15 per share, but Michael Dell would have had to sell all of his shares (so that the buyer could be the 100% owner), would he have presented this as a good deal for shareholders?

Why is $13.65 a good deal for all shareholders other than Michael Dell?

4. Dell says, “We fully believe that we can and will achieve our transformation into a leading global, end-to-end solutions provider, but we are best served pursuing this route as a private company.”

I’m trying to understand why this is.  What about your shareholder base has stopped you from this transformation?

Here’s what really gets me.  I’m going to look into my magic ball and try to see the future.  After this “transformation” is complete, what are the chances that Dell is going to come back and tell me that they will operate best as a public company?  Mr. Magic Ball tells me that the chances are pretty darn high…bordering on 100%.

5. Dell says that they will have “a so-called ‘go-shop’ period, during which the Special Committee – with the assistance of Evercore Partners – will actively solicit, receive, evaluate and potentially enter into negotiations with parties that offer alternative proposals.”

This is being discussed as if it ensures that this is a fair deal – one that is maximizing the value.  From what I’ve read, this is being done to shift the burden of proof in a lawsuit (a lawsuit that I hope and expect will occur).  If Dell did not set up this Committee, Dell would have the burden of proving that this was a fair deal (if they were sued by shareholders).  Since they have established this committee, the plaintiff shareholders will have the burden of proving that the deal is unfair.

So, here’s how I see it.  Michael Dell believes that the company is undervalued.  Shareholders believe that it’s Mr. Dell’s job to maximize the value of the company.  Michael Dell believes that he can maximize the value for himself and Silver Lake Partners.  Apparently, being a public company was holding Dell back.  That makes me feel a lot better.

I have no idea whether Dell should be an $8 stock or a $24 stock (like some of Dell’s institutional investors believe).  (For a very compelling argument that Dell is worth $24, see Southeastern Asset Management’s letter to the Dell board of directors.)  Most importantly, I have not heard any explanation as to why Dell will be more successful as a private company.  This appears to be Michael Dell trying to capitalize on a depressed stock price in order to enrich himself.  Dell has squeezed vendors for years…now they’re squeezing shareholders.  In my opinion, this is the type of behavior that is bad for investors and ultimately bad for capital markets.

Have a great week.

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