Dell buyout of $24.9 bn was underpriced by 22%

A Delaware judge ruled on Tuesday that Michael Dell and Silver Lake Partners under-priced their $24.9 billion buyout of Dell by about 22 percent in 2013, Reuters reports.

Michael Dell, the founder of the PC maker, and Silver Lake Partners may have to pay tens of millions to investors who opposed the deal.

The ruling applies to about 5.5 million Dell shares. The court ruling is a victory for the specialized hedge funds that have tried to squeeze more money from mergers using a type of lawsuit known as appraisal.

The lawsuits allow investors who oppose a deal, such as the bitterly contested Dell buyout, to sue and ask a Delaware judge to determine a fair deal price.

Activist investor Carl Icahn urged Dell shareholders to vote down the deal and take their case for fair value to court. Initially appraisal was sought for about 40 million shares, but the bulk was removed for procedural reasons.

In Tuesday’s ruling, Vice Chancellor Travis Laster said fair value was $17.62 per share, not the $13.75 per share deal price.

Investors, who sought appraisal, will collect about $20.84 per share including interest.

The Dell investors presented evidence that fair value was $28.61 per share, which would have cost Michael Dell and Silver Lake hundreds of millions of dollars. The buyers contended that fair value was $12.68.

Michael Dell and Silver Lake Partners can appeal against the Tuesday’s ruling.

Laster said the Dell buyout took advantage of a dip in the company’s stock price and its board never determined the intrinsic value before negotiating.

“The original merger consideration was dictated by what a financial sponsor could pay and still generate outsized returns,” wrote Laster.

The judge dedicated much of the opinion to explaining why deal price was not a fair value indicator, particularly in a management-led buyout.

The added cost to the buyers from Tuesday’s ruling is about $36 million.

About 3.9 million appraised shares were held by affiliates of Magnetar Capital.

One of the biggest losers from the Dell case may be T Rowe Price, one of the few mutual fund managers to test the appraisal strategy.

T Rowe Price stood to collect around $190 million if its Dell stock had been appraised. Laster also ruled on Tuesday the fund manager was not entitled to interest on its shares.