
Michael Dell Bought His Company Too Cheaply - kgwgk
http://www.bloomberg.com/view/articles/2016-06-01/michael-dell-bought-his-company-too-cheaply
======
sosuke
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.

~~~
lensi
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?

~~~
travisby
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!)

~~~
StillBored
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.

~~~
gohrt
Why didn't you buy shares of brk/b on the day your sale closed?

~~~
NamTaf
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?

~~~
StillBored
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.

------
SilasX
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".

~~~
pilom
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.

~~~
jawilson2
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.

~~~
rayiner
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.

~~~
tomp
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)!

~~~
TheCoelacanth
In a market, typically things are sold voluntarily. These are people who were
forced to sell.

~~~
scotty79
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"

------
grok2
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.

~~~
harryh
Matt Levine is the best. All of his writing is basically like this. Highly
recommended!

~~~
mathattack
He also writes the best footnotes I've ever seen. :-)

~~~
zymhan
Yeah holy crap I'm still reading the footnotes and they may be even more
interesting than the article

~~~
hkmurakami
He is known for his footnotes and acknowledges that he is known for his at
times excessive (much to our joy) footnotes. :)

------
superbatfish
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...

~~~
facepalm
Yeah, as your last paragraph explains, that rule makes the whole thing even
more crazy.

------
pliny
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.

[1]
[http://courts.delaware.gov/Opinions/Download.aspx?id=215980](http://courts.delaware.gov/Opinions/Download.aspx?id=215980)

~~~
thegranderson
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."

[http://www.wsj.com/articles/the-judge-who-shoots-down-
merger...](http://www.wsj.com/articles/the-judge-who-shoots-down-merger-
lawsuits-1452076201)

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.

------
whack
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.

~~~
bigmanwalter
"Markets can remain irrational longer than you can remain solvent." \- John
Maynard Keynes

~~~
tynpeddler
But nobody was insolvent. That quote sounds like it's more suited to
catastrophes than to run of the mill equities acquisitions.

------
nfriedly
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.)

~~~
henrikschroder
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.

~~~
mikeash
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.

~~~
scott_s
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.

------
Shivetya
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

~~~
pliny
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).

[1][http://courts.delaware.gov/opinions/](http://courts.delaware.gov/opinions/)

------
SilasX
Btw HN editors: The title is misleading. What it's actually saying is "Court
shouldn't have ruled that Dell buyout paid too little".

~~~
usefulcat
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.

------
dnautics
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.

Of course, having a judge decide is silly, too.

------
ArkyBeagle
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.

~~~
SilasX
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.

~~~
ArkyBeagle
Shhhh! The Commies might be listening! :)

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.

~~~
goldenkey
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...

------
richardw
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.

~~~
TheCoelacanth
You aren't allowed to get the court to second guess the selling price if you
consented to the sale, only if you were forced to sell.

------
protomyth
Can this ruling be appealed?

------
whitecat
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?

------
spectrum1234
One of the best finance articles I've read in a long time.

------
B1FF_PSUVM
> Again, this is super oversimplified; please don't use this description to
> prepare for your investment banking interviews.

Disregard that note, and sue Bloomberg and the writer anyway. Seems to work,
according to the text.

