Following a ruling made by a judge in Delaware, Michael Dell and Silver Lake Partners undervalued the 2013 sale of Dell Inc by 22% when the business was sold for $24.9 billion. The ruling may mean that tens of millions must be paid back to investors who didn’t approve the deal.
The case will apply to roughly 5.5 million Dell shares and backs up a growing type of lawsuit know as appraisal in which numerous hedge funds are now using as a strategy to generate additional returns on mergers and acquisitions.
Through appraisal, investors who disapprove of a deal, in this case the disputed Dell sale allows them to ask a judge for a fair valuation price for the company.
Well known activist investor, Carl Icahn pushed shareholders to vote against the offer for Dell and to request a fair valuation at court.
During Tuesday’s case, Vice Chancellor Travis Laster stated that fair value for Dell was actually $17.62 a share and not the $13.75 a share which the deal went through at. Now with additional interest on top of the appraisal value, shareholders will receive around $20.84 per share.
Dell shareholders had claimed that fair value for the business was $28.61 per share, potentially it costing Michael Dell and Silver Lake hundreds of millions of dollars. The buyers instead stated their case that fair value was $12.68.
Laster stated that the buyout of Dell was undertaken through a dip in the company’s stock allowing its buyer to purchase it under its intrinsic value without any negotiations.
The Vice Chancellor said:
“The original merger consideration was dictated by what a financial sponsor could pay and still generate outsized returns.”
The judge spent much of the case highlighting why the deal price was not a fair indicator of the company’s price especially with it being a management-led buyout. The additional costs the buyer must payout after Tuesday’s ruling is now $36 million.
Some hedge funds have now started using appraisal as another tool to generate additional returns on capital. Quite often just prior to a deal closing, a hedge fund will purchase stock in a company so they are able to raise an appraisal case.
If investors seek appraisal, they will not be paid on the closure of a the deal however they gain interest on their investment of 5% above the federal discount rate while the case is ongoing. This has been challenged by the U.S. Chamber of Commerce as hedge funds can generate returns even if a case is not successful.