Icahn’s Last Chance on Dell

Carl C. Icahn may have given up his campaign to block Dell Inc. from going private in a vote on Thursday. But the activist investor still has a good shot at another goal: getting more for his shares than the company’s founder, Michael S. Dell, wants to pay.

Mr. Icahn says he will seek appraisal rights in the Delaware courts, a legal maneuver that lets a judge decide how much Dell shares are really worth. And growing evidence indicates that he stands a good chance of coming out ahead by doing so.

In theory, seeking appraisal rights is a risky move – the judge could decide that Dell shares are, fundamentally, worth less than the the $13.75 each that Mr. Dell and the investment firm Silver Lake Partners are offering. Then Mr. Icahn would be stuck with that lower price.

But a new analysis from lawyers at Fish & Richardson suggests that it’s unlikely. In the last 20 years, Delaware courts have rarely settled on a value lower than the transaction price – and never in a deal like the one Dell is contemplating.

The findings echo those of at least two other analyses of appraisal rights cases, cited by Steven M. Davidoff, the Deal Professor, and by Gretchen Morgenson in The New York Times.

The latest analysis, which is planned for publication in Law360on Wednesday, was carried out at the request of the Dell Valuation Trust, a fledgling effort to coordinate investors seeking appraisal rights in the Dell transaction. The trust is being organized by the Shareholder Forum, an organization run by a former investment banker, Gary Lutin, that seeks to inform investors.

The Fish & Richardson analysis found that, in 45 appraisal-rights cases in the last two decades, the courts have set a “fair value” below the corresponding transaction price for just eight deals, or about 18 percent of the time.

None of those eight outliers were “standalone” buyouts, where the company was being bought for its own sake, rather than, say, in order to fold it into another, similar company. Among standalone buyouts, the courts set share values at anywhere from 3.5 percent over the deal price to more than double the deal price.

In other words, if Mr. Icahn’s bid for appraisal rights follows the traditional pattern, it’s unlikely that he’ll receive less than $13.75 a share – and he may well receive more. The same holds for other investors who seek appraisal rights.

Mr. Lutin called appraisal rights “a value investor’s dream come true,” with pricing based not on the vagaries of the market, but on a company’s intrinsic value, as calculated by Delaware judges, who have considerable experience evaluating business arguments.

Nothing is guaranteed, of course. If Dell’s buyout vote fails on Thursday, the transaction falls through and appraisal rights are irrelevant — there’s no deal price to dispute. Some of the companies included in the Fish & Richardson analysis were small, and few deals anywhere match Dell’s in size or scope, leaving it an open question how predictive any retrospective analysis can be.

As for other investors, only those who have jumped through the right hoops ahead of the Thursday vote stand to benefit; other shareholders are stuck with what Mr. Dell and his partners are offering. Given the bureaucratic hurdles involved, it is likely to be too late for most investors to seek appraisal rights now if they haven’t started the process already.

In some ways, of course, it shouldn’t be surprising that investors often win when they seek appraisal rights.

Delaware courts are supposed to take multiple factors into consideration, including market value, asset value, dividends, earnings prospects and intellectual property values. The approach approximates how many investors would calculate a company’s “intrinsic” value.

In other words, to conclude that investors seeking appraisal rights should get less than the deal price implies that the buyers are overpaying on a fundamental level. That’s unlikely, the Fish & Richardson lawyers concluded.

“Management buyers, after all,” they write, “can be expected to know their company’s intrinsic value best and are not likely to convince the court that they knowingly offered to pay more than the company was worth.”