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This logic is terrible. The share holders would have never gotten $17.62 so why are they being awarded $3.87 per share with interest?! Reminds me of the land t

• gxs 10y ago
  Agreed. I am sitting here baffled hoping someone with a finance background comments and explains why this makes sense. Wouldn't this ruling mean that going forward private equity companies will pay even less for companies, building into the price that somewhere along the way they will get sued and have to pony up some more?
  • brians 10y ago
    The argument is that some people were compelled to sell at this low price, and a fair price (the nearly-$18 number) is about what would have persuaded them to sell. All the high-sounding ideas about making arguments by offering to buy ignores the fact that this wasn't a market deal: small shareholders were compelled to sell whether they wanted to or not, and the board had a fiduciary interest to them.
    • gxs 10y ago
      Ah - that does make sense. They were looking out for shareholders who didn't have a choice who would have been happy to wait for years to realize their gains.
      • ScottBurson 10y ago
        I think your second point above is right, though. If this reasoning applies to pretty much any LBO, it has to be factored into the price of future LBO offers.
    • jrsnyder 10y ago
      But all shareholders should have factored in the risk of this situation arising when they purchased the shares, should they not have? The risk of a future buyout-by-vote was always present. This scenario, I assume, was covered in the shareholder agreement?
      • kazinator 10y ago
        And that shareholder agreement doesn't say that after the buyout occurs, those who no longer own the shares are entitled to fantasy money.
      • praxulus 10y ago
        Yes, but the the situation they agreed to was not "majority shareholders can force them to sell for whatever they want. Period." It was that they can be forced to sell, and then they can go to court and say that the price they got was not a fair appraisal of the value of the stock. Now they're arguing that $13.75 was not a fair appraisal of the value of the stock.
      • imh 10y ago
        It sounds like they don't have to factor in the risk of others not doing their fiduciary duty, because the courts will enforce it.
        • jrsnyder 10y ago
          Okay, yeah, dctoedt points to the law[1] where this is described. I did not know about this law. Interesting, though, that the courts' appraisals are trusted over the market in this case. It's sort of like an anti-crowd-dynamics protection, but only for people who vote no. Your decision over whether to vote no is influenced by your knowledge of likelihood for the total vote to succeed, as henrikschroder mentions[2]. [1]: https://news.ycombinator.com/item?id=11816921 https://news.ycombinator.com/item?id=11816921 [2]: https://news.ycombinator.com/item?id=11816784 https://news.ycombinator.com/item?id=11816784
    • henrikschroder 10y ago
      There's plenty of bad decisions that a majority of shareholders can make, that a minority of the shareholders would be against, and which would decrease the value of the shares. But the whole points of shares in the first place is that one share is one vote, and if you want a larger say in the running of the company, you have to put up they money. One risk when investing in a public company is every other shareholder, and in this case a majority of the shareholders voted to agree to the buyout price. Tough cookie for the minority holders who opposed it, but why shouldn't they bend to the will of the majority? Why should they be rewarded after the fact? The precedence seems terrible to me, because as a shareholder in a future case like this, it is clearly beneficial to accept whatever buyout offer is on the table, and the immediately class-action sue the buyer for the difference between that and some fictional "fair" price. What happens if every shareholder does this?
      • ScottBurson 10y ago
        If every shareholder does it, the deal doesn't go through in the first place. The court requires a shareholder to have voted against the deal in order to be a party to the lawsuit.
        • JoshuaDavid 10y ago
          That seems like it sets up a perverse incentive structure, where shareholders should always vote against deals as long as the downside from the chance that their vote causes the deal not to go through is smaller than the upside from the amount they'd expect to gain from the lawsuit.
          • zaroth 10y ago
            It's amusing that several of the issues raised in the recent security analysis of "TheDAO" raised exactly the same issue with their voting structure on Proposals. Namely, game theory showed the best move was to always vote No so long as the No vote wasn't the deciding factor in killing the proposal.
          • gohrt 10y ago
  • ewzimm 10y ago
    If the standard is a 20% return on investment, then any buyout can be proven to be 20% undervalued, negating all benefit, so you're right, the natural response would be to reduce the bid to make up for that, but now that we have this precedent, we can assume they know about it and have even further undervalued any buyout, so we can prove in court that any stock is actually somewhere around 40% undervalued. But any buyer would anticipate this further proof of devaluation and lower their bid even further, so naturally we're going to approach zero bids on provably infinite value stock.
    • smallnamespace 10y ago
      That's probably not right. Under mild assumptions, each successive update to expectations will be proportionally smaller in magnitude, and the price will converge geometrically to a somewhat lower (but non-zero) number. It's the same reason why the government spending multiplier isn't infinite, even though government spending spurs private sector spending, and private sector spending increases the tax base.
      • ewzimm 10y ago
        I was wondering if someone might say something like this! Of course, my statement was meant to be absurd. I was just imagining the arguments of future lawyers explaining how their clients' stocks were infinitely valuable becuase of the assumed profit-seeking behavior and anticipation of lawsuits by investors.
  • fitchjo 10y ago
    I would be shocked if this did not get reversed upon appeal for that very issue - the precedent that would be set by this would wreck havoc on the market.
• mjevans 10y ago
  I think that number was reached by trying to figure out how much value the shareholders would have had if they'd held on (for a long time) and eventually sold after the current plans had come to fruition. The flaw in the logic is likely in that it de-valuates the risk associated with holding on to the shares, particularly in a short term focused market. Also, that over time business strategy and direction change. Finally if they thought the price was too low why did they sell in the first place?
  • deleted 10y ago
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  • joshdickson 10y ago
    Actually, the judge did it pretty much entirely opposite what you're saying. The judge chose the final number largely because he ruled that Silverlake, the private equity portion of the deal, would need to make 20-30% to justify the price of the deal, hence Silverlake's purchase at the lower number actually justified, to him, proof of the price he chose. If Dell wasn't actually worth a 20-30% premium from their purchase price, Silverlake wouldn't have done the deal is the theory. (There are of course issues with this, but this is the logic used.)
    • josh2600 10y ago
      I love this logic because it implies that if a private equity firm buys a company, the shareholders are automatically being screwed and should sue.
      • Animats 10y ago
        That's usually a good assumption. If you're an existing shareholder when a company goes private, you're forced to sell at a set price. That's why it's a legal issue. That forced sale is not a free market transaction. If you look at the history of leveraged buyouts ("private equity" is usually powered by borrowing against the company's assets, not a pure cash transaction), the existing stockholders generally lose.
• gnopgnip 10y ago
  Property tax is often based on its potential value instead of its current use. Just the possibility that the land could be rezoned in the future could increase your taxes.
  • rogerbinns 10y ago
    That still doesn't make any sense. If the property isn't rezoned in the future, do they go back to previous tax payers and refund them the "excess" taxes? What if the property does better than was anticipated? Do previous tax payers now have to cough up more in arrears?
• lensi 10y ago
  I don't understand all the rules at play here, but from a fairness standpoint, you shouldn't be forced to sell. That is the real problem as I see it. At least people forced to sell here got some money to kind of even things out. Can someone enlighten me here? What is the reasoning for allowing people to buy from people who don't want to sell?
  • witty_username 10y ago
    I think the buyer gets a large majority of the votes from the shareholders to sell at $X/share.
  • maxerickson 10y ago
    That's what is in the shareholder agreement. (some sort of majority rule that is)
    • kazinator 10y ago
      If it's in the agreement, how can they have a leg to stand on? They agreed to such a thing! When you're forced to sell at whatever price, you lose any claim on the future price of the stock. If a court can give you more money later, then you effectively weren't really forced to sell the stock. You retained some sort of "ghost ownership" with an entitlement attached. Thus, effectively, the provisions of the shareholder agreement which have to do with this are disregarded.
      • maxerickson 10y ago
        My comment is a response to the post it is attached to, not an analysis of the case. That Dell was an insider probably complicates how to analyze this particular case.
      • cortesoft 10y ago
        As someone in a sibling comment posted, there is a statutory right in Delaware (where Dell was incorporated) allowing shareholders who don't vote for a buy out to demand judicial appraisal for the 'true' value of their shares.
• deleted 10y ago
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• matthewaveryusa 10y ago
  The absolute best example of this were the beany-babies. I'll leave this set of pictures on the estimated values of beany-babies in 2008 from 1998, and their actual values in 2008: https://www.buzzfeed.com/hunterschwarz/how-much-beanie-babies-were-predicted-to-be-worth-vs-how-muc?utm_term=.xwv71aQY2#.gpQkXzpQd https://www.buzzfeed.com/hunterschwarz/how-much-beanie-babie...
• thetrb 10y ago
  I was a Dell employee at the time and the consensus feeling at the time was that Michael Dell got the company for very cheap. Just compare the Dell stock price with its closest competitor HP. You'll see that between Dec 2012 and Dec 2013 HPQ doubled its stock price while Dell just went up by the ~35% premium that Michael Dell paid.
• dharmon 10y ago
  As Dell's vision was realized, the market price would have reflected the increase in value. This means the more disturbing part is that the judge has had 3 years of hindsight where parts of Dell's plan have been realized, making it appear as though they were inevitable when at the time it was still highly uncertain (as reflected in the stock price). If Dell, Inc was now in the shitter he wouldn't be awarding $3.87 / share, that's for sure. The baffling part to me is that he found Dell (the person) and the board conducted themselves ethically during the buyout, yet still found in favor of the plaintiffs. The rule of thumb with management-led buyouts is that the shareholders are getting screwed. If he wasn't hiding information, and wasn't strong-arming the board into approving his offer / not soliciting other offers, then the accepted offer should stand.
  • joshdickson 10y ago
    I am surprised at the amount of misinformation in this thread (have people actually even read the post? It answers most of these questions!). > This means the more disturbing part is that the judge has had 3 years of hindsight where parts of Dell's plan have been realized, making it appear as though they were inevitable when at the time it was still highly uncertain (as reflected in the stock price). If Dell, Inc was now in the shitter he wouldn't be awarding $3.87 / share, that's for sure. That's not what the judge was ruling on, and it's not cited in his decision explaining the numbers (agree with him or not, his reasons are compelling for how he arrived at the numbers). The ruling is that at the time of the take-private, Silverlake must have valued the company at his price - the highest price - because if not, the purchase would not have offered a compelling return for a private equity investor. What's happened in the last three years did not enter the equation.
    • dharmon 10y ago
      When you do valuations you must take risk into account, and with the benefit of hindsight it is far too easy to imagine that 3 years ago the future as it played out was more inevitable than it actually appeared at the time. Hindsight bias is usually unconscious, so its unsurprising that it is not cited in the ruling. Your last sentence suggests that every acquisition is a swindling of shareholders, but again, you are not taking risk into account, and perhaps the judge did not either. Most professional investors do not adequately adjust for risk, so why would I expect a judge to?
• Falcon9 10y ago
  The logic only looks terrible until you follow the course of actions, read the arguments, understand the situation, and realize that actually it's a pretty fair and balanced process.
• seanmcdirmid 10y ago
  This is exactly the problem with the Chinese real estate market. Realtors conspire to keep property prices rising, refusing to show or list any homes that are priced too low, creating panic with consumers and eventually making those prices "real." It can only last for so long.
• btilly 10y ago
  The point is that the shareholders bought it believing that it was worth $17.62. They were both willing and capable of holding it until they were proven right. However they were forced to sell for less than they thought it was worth. To use your comic book example, if you own the comic book, you believe it is worth $1000, and you don't want to sell for a dime less, then it is wrong to force you to sell to someone at $700 just because nobody has yet offered you more than $500. That's theft which can be only made right by returning your comic book or by giving you the price you want.