Category: Negotiating

Shoddy Analysis Could Kill Dell's Chances of Going Private

2/13/2013

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:

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:

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.
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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Rotary Gallop's Analysis Featured In 'The Deal': Office Depot vs Starboard Value

12/6/2012

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We had a great talk with Paula Schaap at The Deal recently about the Starboard Value/Office Depot Activist Situation which we've been following closely It is a fascinating case study in corporate defense. Starboard's chances of winning a proxy battle at Office Depot are about half as much as they were at AOL, where they recently lost. We'll be covering some of our in-depth analysis here over the next couple of weeks so stay tuned. Until then Paula covers our thoughts on Starboard best chance of turning things around, so check out the article!

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Understanding The Power Of Board Seats

3/5/2012

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I have a confession to make: unlike both of my business partners, I am not a natural-born negotiator. Like a lot of Americans, I have been conditioned by shopping in stores where the price displayed is the price paid. We agree at the outset or we don’t do business. Anything else is a rude and uncouth argument. I’ve witnessed my partners in action enough to know that that’s not the way the real world works. (On the lighter side I once witnessed, open-mouthed, one of my partners negotiate an $8 piece of cake for free in return for assurances that if they liked it they might buy it next time and even tell their friends about it!)

I knew this was an area I could really improve on, so I started read a lot of books about how to negotiate. For me, Roger Dawson’s “Secrets of Power Negotiating” stands head and shoulders above the rest. That book taught me to stop viewing negotiation as an argument, and to start seeing it as a fun and fascinating game of strategy.

So when the e-mails between John Cleghorn of Canadian Pacific Railway and Bill Ackman of Pershing Square Capital were released, I was extremely excited to see such high-stakes negotiation play out right before our eyes. I turned to Roger Dawson to help analyze the negotiating tactics between Cleghorn and Ackman.

I suggested to Roger, “between your negotiating expertise and my ability to measure the control of each side under each proposed scenario, we could really dissect and analyze this thing play-by-play and tell the whole story!”

He agreed but added, “the only thing that really stands out as interesting is that Bill Ackman seems extremely aggressive and confrontational. Do you know if this style of negotiation generally works for him, because it’s never worked for me, and I’ve never really seen it work well? Generally, this sort of tone shuts negotiations down.”

That got me thinking … I have never met Bill Ackman, but given his line of business and his success, I imagine he’s not a bad negotiator. Why would he make such a rookie mistake? What if he didn’t make a mistake?

This is the difference between an enthusiastic practitioner and a real master of his craft. I was lost in the trees, simply spotting glorious negotiating tactics flying this way and that, until Roger gently pulled me back – “Did you notice this forest?” The forest was quite fascinating! What I saw was that Ackman was walking a tight wire out of a subtle trap – the negotiations themselves.

Measuring (and gaining) control of a board of directors is difficult. Two seats are definitely better than one, but not exactly twice as good. It is better to replace a sitting member, than to pull up a new chair at the table, and better still to replace one of the opposition. It can all get very muddled. But when you can measure control directly, you can see the forest plain as day. Let me show you:

Exhibit 1 shows Managements’ (Blue) and Pershing’s (Red) control of the board of directors under various hypothetical scenarios. The first scenario is the current 15-member board of directors. Management has 77% control, meaning they hold the deciding vote in 77% of all possible voting outcomes on the board of directors [1].

As we move to the right on the horizontal axis we see the power structure if Ackman is given 1, 2, 3, 4, 5, or 6 seats added to the board.

The brick wall divides the scenarios likely to result from negotiation, from those that would almost certainly require a proxy battle to achieve. Under the possible negotiated outcomes, management retains significant control of the board. If Pershing were to accept 1 or even 2 board seats, they would have very little chance of causing change at Canadian Pacific.

Exhibit 1: Canadian Pacific Railway and Pershing’s control of the Board of Directors

Exhibit 1: Bill Ackman and Pershing square have very little chance of causing change on the board of directors with a negotiated settlement of two or less seats. Such a settlement would likely result in another year for current strategies to play out, while Ackman must wait for the chance to gain additional seats next year. To have an effect on Canadian Pacific now Pershing needs to engage in and win a proxy battle.

Now we see that Ackman cannot win negotiating. The best he can hope for from negotiations is to be stuck on a board he cannot influence for a year while he waits to try again next year.

It’s a tricky situation. Ackman is trying to combat the seemingly cooperative and congenial offer of a seat for himself on the board of directors that both sides know comes with essentially zero power to accomplish anything. If this wasn’t clear at the start, Canadian Pacific’s decision to add two new handpicked members to the board made it loud and clear, before they even made the offer. Now we can understand Ackman’s strategy. He has to negotiate, without appearing unreasonable, and without coming off as too much of a bad guy. To do otherwise would alienate other shareholders. At the same time, he cannot be trapped in a negotiated settlement. Hence the aggressive email followed by the befuddled apology, on the advice of his team.

The pairing of personalities at Pershing Square allows them to naturally implement one of the most powerful and well-known negotiating techniques: good-guy/bad-guy. A more useful, if less pithy, description of good-guy/bad-guy might be sympathetic-and-flexible/emotionally-charged-and-firm (Here is Roger on good guy/bad guy).

The email exchange is a fine example of this technique’s opening rounds, with Ackman’s team nicely set up in the good-guy role. Good-guy/bad-guy is a powerful negotiating gambit, and not easily countered when genuine, as is the case at Pershing Square. Ackman was smart enough to surround himself with cooler heads, and to know that he needs to keep them there. I suspect the cooler heads at Pershing see the value in Ackman’s passion as well. We’ve all seen enough cop-drama to know that when the team gets broken up, they’re useless without each other.

Control measurement reveals several more fascinating insights to the Canadian Pacific vs. Pershing Square case, which we doubt even the players involved fully understand. Check out this article on how significant representation for Pershing Square will double the power of existing independent board members!

[1]: For these calculations we have assumed that management controls 4 of the 15 votes on the board of directors. We have no inside knowledge and have never spoken to anyone on the board. However, we do believe this is a conservative assumption, given that 5 board members have been on the board for 10 years, one board member is the CEO, two board members joined the board in the same month as the CEO, and two more were added in response to Pershing Square.

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Shoddy Analysis Could Kill Dell's Chances of Going Private

Dell’s Deal Diverging

Rotary Gallop's Analysis Featured In 'The Deal': Office Depot vs Starboard Value

Understanding The Power Of Board Seats

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