December 9, 2019

Deal Professor: A Flawed Bidding Process Leaves Dell at a Loss

Harry Campbell

The private equity firm Blackstone Group has exited the stage for Dell, abruptly bringing down the curtain on a budding takeover contest. It has the elements of a farce, and Dell’s board has no one to blame but itself.

The fizzled bidding for Dell is a result of the board’s extreme reliance on a process known as a go-shop and how it ran the initial sale. If this episode does not change the way companies sell themselves, perhaps it should.

A go-shop is a device that companies started using about a decade ago. The go-shop typically provides that after a deal is announced, the target company shops like Paris Hilton, as a Delaware judge once put it, looking to see if another bidder is willing to compete.

Why would the first bidder allow this?

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The answer lies in its origins. Go-shops were first used in private equity buyouts. The private equity firm would often team with management to make a bid, demanding exclusive negotiations. Boards would agree to this exclusivity but in exchange demand a period of time when alternative bids could be solicited. This way they could be assured that the company was being sold for the highest possible price.

Yet there is also plenty of skepticism about this process. The conventional wisdom is that go-shops are a hollow ritual. The feel-good perception that the company is being actively shopped covers up the fact that the initial bidder has a perhaps unbeatable head start. Once a deal is announced, others don’t have time to catch up, nor do they want to get in a bidding war. A go-shop becomes just a cover-up for a pre-chosen deal.

There is truth to this. At least one study has found that go-shops don’t generally attract higher-valued bids when management and private equity firms are involved. This makes sense. After all, if the original bidding group has management locked up, how is a subsequent bidder going to run the company?

Despite such concerns, the Dell board used both exclusivity and a go-shop in structuring the sale process, although it did add some frills to try to protect shareholders further.

Instead of running an open auction contest at the very beginning, the Dell board negotiated with the private equity firms Silver Lake Partners and Kohlberg Kravis Roberts Company. When K.K.R. dropped out, the board asked TPG to join the process.

But the board focused on only two bidders at a time and didn’t reach out to others. Instead, when Blackstone called about a deal in January, it was left to bid only in the go-shop after it was announced that Michael S. Dell and Silver Lake were offering $13.65 a share to take Dell private.

It is curious that the Dell board adopted the go-shop process so wholeheartedly. Even in the best of circumstances, they are seldom successful. Since 2004 there have been 196 transactions with go-shops in them, according to the research provider FactSet MergerMetrics. In only 6.6 percent of these did another bidder compete during the go-shop period. More than 93 percent of deals with go-shops do not attract competing bids.

You can slot Dell into the overwhelming majority. The Dell board hired Evercore to run the go-shop, and the investment bank contacted 71 parties. Now Dell appears left with only Carl C. Icahn.

It might have turned out differently, if the board had pulled Blackstone fully into the sale process before the announcement of an agreement to sell the company to Silver Lake and Mr. Dell. By failing to include Blackstone — with its growing technology practice that includes a former executive of Dell — from the get-go, it allowed the go-shop process to unfold in the harsh glare of the media.

And when your business is something like a melting ice cube, time matters. A recent International Data Corporation report showed the PC business in a free fall, with United States shipments down 12.7 percent in the first quarter of this year compared with the previous year, and Dell falling behind its competitors. The deterioration in the business was one of the reasons Blackstone decided not to bid.

Hindsight is 20-20, of course. Still, Dell’s board should have known that how it ran the sale would come under harsh scrutiny. Dell’s biggest shareholder outside of Mr. Dell, Southeastern Asset Management, had told the Dell board before the proposed buyout was announced that it would not support a transaction where it could not roll over its shares and that was not in the range of $14 to $15 a share, according to a securities filing. That Southeastern is now heavily protesting this deal is no surprise.

People close to Dell vigorously defend the sale process, calling the go-shop a “success” since it brought Blackstone even this close to bidding.

But Dell’s use of the go-shop now leaves its shareholders with a hollow choice. Silver Lake and Mr. Dell will most likely wait it out, possibly raising their offer a quarter or two at the last minute to win over shareholder holdouts. They certainly have no incentive to do anything before then or to do much more, if even that. And then shareholders will be forced to vote between this deal and taking the risk with a still publicly traded company that Blackstone has now so publicly spurned. It’s really not much of a choice.

Moreover, there will now be furious lobbying by Southeastern and Mr. Icahn to have equity stakes in a newly private Dell rather than take the buyout offer. Southeastern wants to salvage its investment in Dell — its cost basis in the stock is above the current offer price. But it appears the fund has little leverage unless it can persuade these now doubly cowed public shareholders to play a game of chicken with Mr. Dell.

At this point, it is simply speculation whether there could have been a healthy bidding war for Dell. Yet there are lessons here for companies that use go-shops in the future.

The risk that the process leaves shareholders with no real choice is particularly keen when management is involved. Dell’s board went admirably out of its way to secure the cooperation of Mr. Dell with any winning bidder, but even then it appears that he was not so willing to cooperate with Blackstone, as Andrew Ross Sorkin of The New York Times noted in his column.

Running a full auction of a company beforehand when there is leverage to fully secure management’s cooperation appears to be the better course.

In other words, the next time a company says that the price being paid to shareholders will be a good one because they have a go-shop, be wary. And as for directors, when executives from a private equity firm with $51 billion in assets under management comes knocking on your door, you might not want to turn them away.

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DealBook: Dish Network Makes Bid for Clearwire

8:08 p.m. | Updated Not so fast, Sprint.

Dish Network made an unsolicited bid on Tuesday for Clearwire, the wireless network operator, a complicated offer that threatens the existing takeover deal by the company’s majority owner, Sprint Nextel.

As part of the deal, Dish would pay $2.2 billion for a portion of Clearwire’s valuable wireless spectrum and forge new commercial ties with Clearwire, fulfilling a vision of creating a new cellphone service provider. Dish, a satellite TV company, is also offering to pay $3.30 a share for Clearwire stock, 11 percent more than Sprint’s existing proposal. The bid values Clearwire’s shares at $4.9 billion.

Shares in Clearwire jumped more than 8 percent in after-hours trading on Tuesday, to $3.16, as investors apparently anticipated a bidding war for the struggling company.

Clearwire’s spectrum is the lure for both suitors.

Sprint is hoping to expand its next generation of data services. It is now building out its Long Term Evolution, or LTE, network, which can support the latest smartphones.

Dish has been steadily acquiring spectrum assets in recent years. To that end, it bought the satellite operator DBSD North America out of bankruptcy in 2011. Last month, the company won a critical regulatory ruling giving it the right to convert some satellite airwaves for cellphone service.

But Dish’s proposal for Clearwire faces significant hurdles. Sprint already owns more than 50 percent of Clearwire, and numerous agreements between the two companies would most likely prohibit the sort of commercial ties that Dish is seeking.

Sprint said the Dish proposal was “illusory” and “not viable.” “Sprint believes its agreement to acquire Clearwire, which offers Clearwire shareholders certain and attractive value, is superior to the highly conditional Dish proposal,” Sprint said in a statement.

Still, Dish and its chief executive, Charles Ergen, may be seeking to attract investors unhappy with Sprint’s offer. Several shareholders, including activist hedge funds, have declared the Sprint’s offer too low.

“If nothing else, Clearwire’s description of the Dish offer proves one thing: Sprint’s offer to purchase Clearwire’s stock is inadequate,” one of those hedge funds, Crest Financial, said in a statement.

This post has been revised to reflect the following correction:

Correction: January 9, 2013

An earlier version of the article said that the Dish proposal valued Clearwire at $2.4 billion. It values Clearwire’s common shares at $4.9 billion.

A version of this article appeared in print on 01/09/2013, on page B7 of the NewYork edition with the headline: Dish Network Tops Sprint In a Bid to Buy Clearwire.

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DealBook: At the Big Board, Seeking Rejuvenation in Consolidation

The New York Stock Exchange on Thursday.Richard Drew/Associated PressThe New York Stock Exchange on Thursday.

When the chief executive of IntercontinentalExchange approached his counterpart at NYSE Euronext about a merger in late September, they quickly came to terms, hashing out a deal in only three months.

The union just made sense.

NYSE Euronext, the owner of the New York Stock Exchange, facing a slowdown in its core equities trading business, was mulling a number of options after a deal with the German exchange fell apart last year. IntercontinentalExchange, an upstart in the high-growth derivatives market, had long sought both an international platform and a way to expand its footprint in futures trading, having lost a bidding war for a London exchange.

They both got what they wanted.

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On Thursday, IntercontinentalExchange, or ICE, said that it would pay $8.2 billion for NYSE Euronext, creating an imposing trans-Atlantic giant in stocks, derivatives and commodities trading. The deal revives a stalled push for consolidation among market operators at a time when bigger is not only better but necessary.

“It’s about the things that don’t happen,” Duncan Niederauer, NYSE Euronext’s chief, said in an interview on Thursday. “It’s good that we kept the door open. We always thought that this was a good partnership.”

NYSE Euronext has eyed a deal with its younger rival for a while.

In internal discussions with his board three years ago, Mr. Niederauer noted that ICE would complement its core businesses and help the company gain scale. He contended that marrying his slow-growing stock trading business with ICE’s enormously profitable commodities markets would rejuvenate NYSE Euronext.

It would also benefit the crown jewel of NYSE’s portfolio, Liffe, a London-based futures exchange. By teaming up with ICE, the company would add a much-needed platform to settle customer trades. In essence, NYSE would have a one-stop shop for trading and clearing futures.

The merger also seemed unlikely to invoke the ire of antitrust regulators, unlike a deal with a top rival in equities like the Nasdaq OMX Group. NYSE Euronext and ICE have very little overlap in their main businesses.

Last year, NYSE Euronext tried to strike a deal with the German exchange, hoping to create one of the world’s biggest derivatives exchanges. The threat of that was enough to drive ICE’s chief, Jeffrey Sprecher, to partner with Nasdaq on a hostile $11 billion bid for NYSE Euronext.

During that time, Mr. Sprecher — by his own reckoning — criticized the parent of the New York Stock Exchange in as many ways as he could. NYSE Euronext’s board, he said, was “the only obstacle” preventing shareholders from getting a good deal. But the ICE chief said on Tuesday that he had refrained from personal attacks, given his long and friendly relations with Mr. Niederauer.

When the Justice Department blocked the hostile bid on antitrust grounds, Mr. Sprecher wondered whether he had severed their friendship. But several weeks later, after one of ICE’s quarterly earnings presentations with analysts, he received a quick e-mail from Mr. Niederauer. It simply read: Good call.

“It was a magnanimous gesture,” Mr. Sprecher said on Thursday.

Soon, the NYSE Euronext found itself in a bind. European regulators squashed the deal with the German exchange in February, leaving NYSE scrambling to find another solution to its growth problems.

The NYSE Euronext had lost a year in creating a clearing platform for Liffe, putting those efforts aside as it focused on the German merger. And investors continued to lose faith in the company. At a market value of $5.6 billion in June, NYSE Euronext seemed to have little of value but its London unit.

The board considered multiple options, including buying and selling assets. NYSE Euronext joined the bidding for the London Metal Exchange, but dropped out of the race early as the potential price rose. ICE also took a run at the London market, ultimately losing to the Hong Kong Exchange’s $2.1 billion bid.

NYSE and ICE went back to the drawing board. In late September, Mr. Sprecher approached Mr. Niederauer, and the two companies found themselves in alignment on several issues.

Mr. Sprecher indicated that he was willing to maintain two headquarters, ICE’s home in Atlanta and the Big Board’s center in New York City. He hoped the move would help allay concerns from people like Senator Charles E. Schumer of New York, who had warned that the N.Y.S.E. name had to come first in the deal for the German exchange.

The two sides struck a separate agreement in which Liffe would use ICE’s clearing services by next June, even if the merger fell apart. Mr. Sprecher will also weigh a spinoff of NYSE’s European stock markets in an effort to shed nonessential businesses that come with a tangle of national regulators.

During the talks, Mr. Niederauer showed little hesitation in the revamped management structure. When the deal closes, he will be ICE’s president and will report to Mr. Sprecher.
ICE offered a generous premium for NYSE Euronext from the start, according to people briefed on the matter. Eventually, the company sweetened the terms to $33.12 per share in stock and cash. The two sides also calculated $450 million in cost savings in the second year after the deal closes. While Mr. Niederauer met with officials from the CME Group several weeks ago, no rival proposal emerged, some of the people briefed on the matter said. By that point, most of the terms of the deal with ICE had been ironed out.

People involved in the talks said that one date — Dec. 20 — had been circled on Mr. Niederauer’s calendar. The NYSE chief had a longstanding appointment to meet with European regulators the day before, and wanted to have a done deal to present alongside Mr. Sprecher when he met with them.

With NYSE’s board having discussed the transaction at length in meetings last week and on Monday, the two men flew to Europe to make their presentation. They returned to New York City after midnight on Thursday to unveil the deal — one that ultimately reflected the diminished position of the once powerhouse market.

“Let me be clear that this combination — while friendly and strategic — is an acquisition, not a merger of equals,” Mr. Niederauer wrote in an internal memo to NYSE employees on Thursday. “We’ve built a stronger company, with a great brand and a bright future.”

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U.S. Networks Add Britons to Royal Wedding Coverage

Ms. Nachmanoff, the executive in charge of talent for NBC News, knew what she wanted: an eminent British historian; a tabloid editor with deep knowledge about the royal family; a person who played a part in Princess Diana’s wedding 30 years ago. And she knew that other television networks wanted the same.

Because every network will be sharing the same camera feeds of the royal wedding on Friday morning, they have competed fiercely to sign up on-air talent in an attempt to make their hours and hours (and hours) of coverage stand out.

The most sought-after pundits have been signed to long-term contracts worth over $100,000; some even have deals with several outlets. The author of one book about the couple, Katie Nicholl, was the subject of a bidding war; she will be simultaneously working for ABC News, CNN’s “Piers Morgan Tonight” and the entertainment newsmagazine “Extra.”

The networks opened their wallets partly out of necessity: there is a long history in Britain of people being paid for interviews, and of giving short- and long-term contracts to experts is one way to meet that expectation. Fortunately, there is no shortage of talent to pick from in England, where reporting, gossiping and opining on the royal family is a full-blown industry.

But the costs have quickly added up for network news divisions, some still understaffed after years of cutbacks. Having sold special advertising packages for the event, networks are betting viewers are as interested in the wedding as their news anchors and producers evidently are.

As soon as the wedding date was set, “you would be shocked by how many e-mails we got from agents pitching their client as the royalty expert because they once saw Prince William, or once met Kate Middleton, or have once had dinner in the same restaurant,” said Rob Silverstein, executive producer of “Access Hollywood,” which is moving to London for a week.

Hollywood agencies including WME, CAA and ICM not only pitched experts for the wedding day, they sold what were effectively packages of experts for the television documentaries that are leading up to the ceremony.

“As long as you have an English accent,” Mr. Silverstein joked, “you’ll work.”

The pitches have not stopped, said Brent Zacky, a vice president at TLC, recounting a New York agent who pitched a “wedding expert” to him just last week. “There’s last-minute jockeying going on,” he said, even for one-time guest appearances.

The guest booking wars “have been ferocious,” said Piers Morgan, the CNN anchor.

But for the most part, each network’s plans are firmly in place. Along with A-list anchors, there will be Britons (the reality show host Cat Deeley will be on CNN), celebrities (Goldie Hawn will be on ABC’s “The View”) and journalists who covered Princess Diana’s wedding in 1981 (the former “Good Morning America” co-host Joan Lunden will be on Fox News).

TLC hired Amanda Byram, a native of Ireland who now lives in Britain and hosts television shows there, because “it’s important to have a local voice alongside our American voices,” Mr. Zacky said, echoing executives at other networks.

Those executives said in interviews that they doubted specific experts would actually sway the ratings on the wedding day.

“For the most part, this is a festivity that you don’t see a lot in life, so you just let it speak for itself,” said Bill Shine, an executive vice president at Fox News. But there are still hours of air time to fill before and after the ceremony.

“The palace has said that no friends can talk, so we have to rely on our knowledge, on our correspondents’ knowledge and experts in different fields,” said Barbara Walters, who will be co-anchoring with Diane Sawyer on ABC. On Friday afternoon, Ms. Walters was packing her bags for London, since many American news programs and entertainment shows will be in royalty mode starting on Monday.

After her first trip in December, Ms. Nachmanoff was back in London at the end of February to firm up NBC’s deals with experts like Camilla Tominey, the royalty editor for the Daily Express newspaper, and Andrew Roberts, the historian.

Perhaps NBC’s biggest coup was signing a long-term contract with Ben Fogle, a British television host who traveled in Africa with Prince William last year and who will be attending the wedding. (He will be hurrying to a camera position outside Westminster Abbey to recount his attendance afterward.) NBC calls Mr. Fogle a “special correspondent” and says he will stay on at least through the Summer Olympics in London next year.

No one would comment on the costs of all this expertise, citing confidentiality, but privately some agents and executives said thousand-dollar appearance fees for a segment were far more common than the six-figure salaries that “special correspondents” have received.

ABC’s biggest booking was probably Ms. Nicholl, whose book “William and Harry: Behind the Palace Walls” was published a week before the wedding date was announced. Like Mr. Fogle, Ms. Nicholl has been deemed a “special correspondent.”

ABC’s other contributors will include Tina Brown, the Newsweek and Daily Beast editor, who has a long-term contract with “Good Morning America;” one of Princess Diana’s bridesmaids, India Hicks; and a former press secretary for Prince William, Colleen Harris.

CBS, which is spending less than NBC or ABC to cover the wedding, has fewer contributors on its payroll. Its top “royal contributor,” Victoria Arbiter, who was raised in Britain but now lives in New York, also has deals with CTV in Canada and Channel 7 in Australia.

Among other experts working for several outlets is Mr. Morgan’s wife, Celia Walden, who writes for The Daily Telegraph. She will be appearing on NBC and “Extra” in the United States as well as on ITN in Britain.

Mr. Morgan, who is British, said what he wants out of his guests on “Piers Morgan Tonight,” his 9 p.m. show on CNN, are personal stories and anecdotes. He said he would be recalling a private lunch he had with Princess Diana and Prince William when the prince was 13 years old. Of the bookings, he said, “It’s less about A-list faces. It’s ‘Do they know the royals or not?’ ”

The royal couple’s closest friends, presumably, will be at the wedding, not at the multistory media complex beside Buckingham Palace.

And that is partly why producers like Mr. Silverstein, of “Access Hollywood,” are having fun with the affair — and with the appointed experts who will be crowding onto television to talk about it. In a nod to Harry Potter, Mr. Silverstein has called his in-house expert, Neil Sean, a “royal wizard.”

“There are royal wizards everywhere,” Mr. Silverstein exclaimed. “They truly materialize anywhere you want them.”

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