Using the proposed management buyout of Dell, Holman Jenkins offers a muddled and largely uninformative take on MBOs:
Yes, private-equity investors sometimes pay a premium to take a public company private in order to change management or strategy. That's not the case here. Much "legacy" talk has circulated about Mr. Dell's motives. Oddly, this doesn't help his case either, implying that he has been sacrificing shareholder interests all along in a quest for redemption.
Whatever Mr. Dell intends, moreover, stockholders can clearly see a tax arbitrage at work. Dell is still a profitable company. They suspect Mr. Dell and Silver Lake of taking advantage of Dell's depressed share price and the tax deductibility of LBO debt to get rid of Dell's outside shareholders on the cheap and capture more of Dell's ample cash flow for themselves.
So what does Jenkins think we should do about these sort of transactions?
Some will tell you, in all seriousness, that management buyouts like Dell's are inherently corrupt and should be banned as a matter of law.
A counterview is that, with thousands of public companies to choose from, investors knew they were getting in bed with Mr. Dell. One reason Dell was cheap was because of its CEO-founder's legacy-itis.
Conflicts of interest are intrinsic to any modern business run by insiders for the benefit of outside shareholders. Conflicts of interest are not aberrations. Corporate governance is the market's answer to these conflicts, in which shareholders withhold their capital unless satisfied with the rights afforded them, and then they take their chances. ...
Dell shareholders may have to hold their noses and take Mr. Dell's offer—and perhaps think twice next time before investing in a troubled company whose founder is still on the premises.
My own take is somewhere in the middle between banning MBOs and simply saying caveat emptor. More precisely, I think Delaware corporate law gets it pretty much right. Steven Davidoff explains:
In the Siliconix and Pure Resources opinions, Delaware courts held that a majority shareholder could freeze out and acquire a minority shareholding and avoid “entire fairness” review if the acquisition occurred via a tender offer rather than a merger. The business judgment rule would apply and the court would not second-guess the sale price or process so long as certain requisites of process were followed, including consideration by a special committee of independent directors and the inclusion of a noncoercive majority of minority condition in the tender offer. ...
Delaware courts have continued to push procedural mechanisms as an appropriate remedy in transactions involving controlling shareholders. ...
In light of this law, certain practices have been developed to ensure that these rules are followed in M.B.O.’s and freeze-outs, including the formation of special committees of independent directors with independent advisers. To protect shareholders, go-shop provisions and majority-of-minority conditions are included in acquisition agreements. Moreover, boards have been negotiating deals with lower termination fees to encourage bidding in the case of M.B.O.’s.
Recent research by Matthew Cain and Steven Davidoff (36 Del. J. Corp. L. 849) confirms that these procedural protections provide investors with significant protections:
... we compiled a dataset of MBOs announced from 2003 through 2009. We then empirically studied the contract terms and processes associated with these transactions. In addition, we compiled from court records an extensive set of litigation rates and outcomes in order to measure the effect of litigation on MBO outcomes. We have thus measured the value of “process” through board procedures, contractual mechanisms, and litigation in conflicted interest transactions involving MBOs. ...
... Our results show that process indeed matters in MBOs, and that certain mechanisms which empower shareholders in the decision process appear to particularly matter. In addition, we find that MBO merger transactions with controlling shareholders, which are also subject to “entire fairness” review, do not result in higher offer premiums. Our results provide support for the Delaware courts' adoption of procedural protections in takeovers where management principal/shareholder agency conflict exists.
So Dell will need to provide its shareholders with significant procedural and process protections or run the risk of litigation setbacks and substtnial liability. But you wouldn't have learned that from Jenkins.
