A Vice Chancellor (we love that title) of the Delaware Chancery Court recently ruled that Michael Dell and Silver Lake Partners undervalued Dell, Inc. stock by more than 26% in engineering a going private transaction, to the detriment of shareholders. After hearing the discounted cash flow analyses of experts for both sides, at an appraisal trial, the VC (apt abbreviation) rejected both.
In doing so, he noted that market price is not necessarily an indicator of value, a proposition that seems, at first blush, to be mildly shocking. We are used to searching for value in closely held businesses because they have no public market to provide value. Where there is a public trading record, we do tend to accept it: the market rules. Minority discounts are even baked in because every share is a non-controlling interest.
The VC’s reasons that public share value is a reflection of perception in the marketplace from known information, presumably from regulatory disclosures, proxies and press accounts perhaps. They lack, however, insiders’ understanding which yields a more sophisticated measure of value. A little bit troubling as an investor, but sure: not everything is public record. With a going private transaction, wherein public investors are being divesting of their stakes, the company owes a fiduciary duty to maximize shareholder value, so his reasons commonsense.
We won’t get into the DCF decision-making of the VC. Interesting to some but as dry as a bone to most.