Dell buyout

I’ve been thinking… Why is there such radio silence on the status of the proposed buyout of Dell?  Also, if the investment adage that “in price there is knowledge” is true, then what can be learned from Dell’s current share price?

Recall that on February 5, 2013, Dell announced that a group led by Michael Dell and Silver Lake Partners struck a complicated buyout deal with the Special Committee of the Dell Board at $13.65 per share.  In my experience, such an announcement required that both sides had completed reasonable due diligence investigations to negotiate the terms and conditions that each reasonably believed were fair and based on an accurate and complete understanding of material information.  But since then, a number of major investors have complained the $13.65 price is too low and that a price in the low $20s is more reasonable.  The buyout sports a 25% premium over Dell’s January 11^th $10.88 closing price, before Bloomberg announced the buyout negotiations.  While the 25% premium is reasonable, it’s a long way from the premium implied by a price in the low $20s.

What’s next for Dell?  Expect Dell’s radio silence to be broken with news of a higher price.  This expectation is despite conventional wisdom that shareholders invariably vote for deals negotiated by Special Committees, especially in cases like this where the founder and CEO leads the buyout group.  Moreover, the Dell buyout was negotiated with significant shareholder value protection devices, which are beyond the scope of this post.

Why the radio silence?  Reasonable due diligence investigations are fact specific and take time.  For Dell’s Special Committee and Board (and their respective advisors), the go-shop period still has weeks to run and the results could be critical to placating dissatisfied institutional shareholders.  For the Michael Dell-led group (and its advisors, investors and lenders), additional due diligence is undoubtedly required to justify paying a higher price…a decision to be arrived at either on their own volition or through exercising their matching rights of another, higher bidder.

Why so confident a Dell buyout will occur…and at a higher price?  There are many reasons, but the focus of this post is on the stock market adage, “in price there is knowledge.”  Exactly what knowledge is there in Dell’s March 4 $14.00 closing price?

Here’s one takeaway: a buyout is going to occur because, at $14.00, Dell is trading well above the $10.88 closing price that existed before the market learned of the buyout discussions.  Why so sure?  If the market believed that the Michael Dell-led group (or less realistically some other group) would not be able to consummate a buyout in a reasonable time period, then Dell’s share price would no longer reflect the buyout premium.

Here’s another takeaway: the buyout price is going to be higher than the originally proposed price because, at $14.00, Dell is trading 2.5% above the announced price of $13.65.   Why so sure?  If the market believed that the buyout parties would not be able to agree on a higher price than $13.65, then Dell’s share price would be trading below the announced $13.65 price…a price Dell hasn’t seen in weeks.