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Shoddy Analysis Could Kill Dell's Chances of Going Private

2/13/2013

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WSJ's recent in depth write up of the opposition to DELL's going private transaction is unfortunately marred by some shoddy analysis. It is important to highlight because  if these kinds of mistakes are made by DELL's advisers it could sink the whole ship. 

For the sake of people basing decisions based on the type of information in the WSJ's article, I must take issue with the quoted analysis of Toni Sacconaghi of Sanford Bernstein. Here is the offending paragraph:
Some analysts said a majority of Dell's shareholder base are still likely to support the deal. Sanford C. Bernstein analyst Toni Sacconaghi estimated that roughly 20% of Dell's shares are owned by merger-arbitrage traders "who will vote for the deal," he said, adding that "nearly 50% of Dell shares outstanding have turned over since the deal first leaked."

Mr. Sacconaghi added that 8% of Dell's owners are passive index funds that "will very likely vote for the deal," and that about 60% of Dell's 25 largest shareholders after Mr. Dell purchased their stock on average at less than $15 a share, "suggesting some among them may support the deal."
The three points attributed to him are all, at best, misleading. I’ll take them one at a time:
  •  Sanford C. Bernstein analyst Toni Sacconaghi estimated that roughly 20% of Dell's shares are owned by merger-arbitrage traders "who will vote for the deal," he said, adding that "nearly 50% of Dell shares outstanding have turned over since the deal first leaked."
I have no estimate of arbs voting for Dell’s deal and so don’t take issue with the 20% quoted, but left unsaid is Mr Sacconaghi’s guess as to what part of the 30% remaining will likely vote against the deal. Is it 5%(Good for Dell), 20%(Good for Southeastern and T. Rowe), 30%(Very Good for Southeastern and T. Rowe)? These are all very different situations, so without this number, the information contained in this statement is ZERO. 
 Mr. Sacconaghi added that 8% of Dell's owners are passive index funds that "will very likely vote for the deal,"
The latter half of this statement is simply not true. Passive index funds tend to vote with management, except when they don’t. The more useful statement is that they tend to vote together and they tend to vote with the crowd. The fact that the two largest shareholders, themselves respected institutional investors, have come out against the deal dramatically raises the chances that the Vanguards of the world with vote against the deal as well. (Get in touch for links to a great academic study on this point) 
  • and that about 60% of Dell's 25 largest shareholders after Mr. Dell purchased their stock on average at less than $15 a share, "suggesting some among them may support the deal."
This statement also seems completely empty of content. I could simply point to the fuzziness of the quantitative estimate of “some shareholders”, but let’s charitably assume that some shareholders is a lot, say even more than half. We still can’t take anything from this statement because if about half of shareholders (60%) bought their stock at less than $15 (and so some among them might support the deal), then it follows that about half of shareholders (40%) bought their stock at more than $15 (and so some among them might be against the deal). To put things more clearly the whole thing is a wash. 
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Dell’s Deal Diverging

2/12/2013

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Investment fund, T Rowe Price, has opposed Michael Dell's plans to take Dell private.  For details on the opposition see the WSJ write up here. The gist is that T Rowe Price and Southeastern Asset Management have a blocking position on the deal, but they are crucial players to get the deal done. 


Here is  what Rotary Gallop’s Control Analysis Reveals:
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This analysis assumes that Southeastern Asset and T Rowe Price vote against the deal and all other shareholders are as likely to vote for it as against it.

  • It is not a surprise that Dell is a prime target for going private. High insider ownership is big plus for these transactions. According to our soon-to-be-released Control and Vulnerability in the S&P500 Study, Dell ranks in the top 10th percentile for insider’s control. They are number 4 in the Information Technology sector and number 1 in their sub industry. (You’ll be hearing a lot more about this study in early March)
  • Because insiders will not be voting, S&T (Southwestern Asset Management + T Rowe Price) has 14% of the effective vote. That is more than 3 times the next largest shareholder. 
  • This give S&T Control (read the deciding vote) in 86% of all possible outcomes to this shareholder vote, and a 93% chance of winning. 
  • No one else has control over 12%. Only 4 other shareholders have more than 5% control.
  • In order for S&T to lose, there would have to be near-uniform support for the deal from all other shareholders. 
  • When you add the fact that abstention counts as a no-vote it becomes effectively impossible for Dell to win without S&T's support. 
  • Therefore if the deal is going to move forward Dell will have to find a way to please S&T. 


Note 1:  There are two factors that, given reliable information, would improve the calculation:
  1. An estimate of the percent of outstanding stock that will abstain from voting - This will likely fall somewhere between 5 and 12%. This factor will decrease Dells chances of winning. 
  2. An estimate of the Arb position in the stock and what fraction of it is positioned FOR the deal - This factor may improve Dell's chances of winning, but it depends drastically on the estimate.
Note 2: The above analysis uses the current known list of shareholders, and does not account for likely large number of arbs who are now in the stock. You'll find reference in the linked WSJ story to an estimated 20% of voting stock held by arbs, and some analysts hoping that those shares will make it an easy win for DELL. No such luck! We'll ride right past the fact that arbs can take both sides of a deal, especially one with hints of trouble, and simply note that 20% doesn't come close to matching the ~15% of shareholders who are publicly against the deal when you add in any reasonable estimate of abstention, which can ranges from 10-20%. )
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