The Delaware Supreme Court has reversed the Court of Chancery’s appraisal decision in Dell, Inc. v. Magnestar Global Event Driven Master Fund Ltd. et al. The Chancery Court had found that fair value was 28% above the deal price.
In the 82 page decision, the Delaware Supreme Court noted that the trial court lacked a valid basis for finding a “valuation gap” between Dell’s market and fundamental value. The Court noted the record showed just the opposite: analysts scrutinized Dell’s long-range outlook when evaluating the Company and setting price targets, and the market was capable of accounting for Dell’s recent mergers and acquisitions and their prospects in its valuation of the Company.
The Court also rejected the Chancery’s Court finding that the lack of strategic bidders was a credible reason for disregarding the deal price. The Court noted that DFC Global Corp. v Muirfield Value Partners, L.P. et al stood for the proposition that the notion of a “private equity carve out” stood on especially shaky footing where other objective indicia suggested the deal price was a fair price. The Court stated it was clear that Dell’s sale process bore many of the same objective indicia of reliability that it found persuasive enough to diminish the resonance of any private equity carve out or similar such theory in DFC. Nothing in the record suggested that increased competition would have produced a better result.
Finally the Court noted that features of management buy-outs which can undermine the probative value of the deal price were not present in the Dell sales process. The Court discussed the “winner’s curse” theory which is based on the premise that in outbidding incumbent management to “win” a deal, a buyer likely overpays for the company because management would presumably have paid more if the company were really worth it. Essentially, a “winner’s curse” theory undermines the utility of a contractual go-shop period. According to the Court, the likelihood of a winner’s curse can be mitigated through a due diligence process where buyers have access to all necessary information. Here, Dell allowed a sophisticated go-shop bidder to undertake “extensive due diligence,” diminishing the “information asymmetry” that might otherwise facilitate a winner’s curse.