Dell’s Deal Diverging

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:

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%. )