Now for a few words
about the proposed leveraged buyout of
Dell, the estimable Michael S. Dell himself, and law and
ethics.
We all like to make
money on stocks. We all like to find a company whose stock price --
for any reason -- doesn't come even close to its real asset value,
or its value if it were cleverly reorganized and produced better
earnings. We like to then buy the stock and hope that the real value
comes out in the price.
But not all of us have
the same opportunities and the same duties under law and ethics. If
a fine company like Dell (ticker: DELL) suffers reverses in its
stock price and earnings because of how the market views the future
of computing and connecting, we outside stockholders can buy a few
shares of stock, just sit there, fingers crossed, and hope for
better days.
Gary Hovland for
Barron's
If you
believe in truly independent directors when immense sums
are on the table, you're a hopeful and optimistic human
indeed. And one who perhaps hasn't spent much time among
public companies' top managers. |
|
But if you are Michael
Dell or Dell's top managers or its investment bankers, you are in an
entirely different position from the outside investors, even very
large outside investors.
You are actually in a
position to know in detail what Dell is worth, as a whole and
segment by segment. You know how changes will move earnings and how
much a breakup and sale will yield, compared with the stock
valuation at any given time. You can buy the whole company.
That way, you can
arbitrage the value of the company -- what you know to be its real
value or, at any rate, its likely value -- against the stock price,
and make some real money.
Insiders who did so by
bringing their companies private over the decades include David
Rockefeller with Rockefeller Center Properties and John Kluge with
Metromedia. Six years ago, Richard Kinder took part in a
privatization deal that left him owning 23% of
Kinder Morgan (KMI), a stake worth nearly $10 billion now
that the pipeline company is public again. And Thomas Frist Jr.,
co-founder of
HCA (HCA), has taken that hospital-management company
public and then private several times, amassing a fortune that
Forbes estimates at $4 billion.
Barron's has
raised real questions about the Dell deal. In several articles in
print and online, the magazine's Andrew Bary has shown why the price
of $13.65 a share looks way too low.
The real problem, to
me, is that immense insider stockholders like Michael Dell and his
managers are supposed to be fiduciaries for the little stockholders.
They are required to put our interests ahead of theirs -- to forgo
profiting at our expense, to avoid even the appearance of conflict
of interest, and to disclose to us shareholders every material fact
of every transaction. Like everyone else, they are forbidden to
trade on insider information. (By the way, I own Dell only as part
of an index fund.)
But in a going-private
deal led by management or a founding stockholder, management by
definition is trading on insider information. These insiders know
far more about the company's value than we little fish. They're
acting on that information by buying all of the corporation's stock.
That's insider trading, in my view.
Again, they are
fiduciaries. But they aren't putting their trustors' interests (the
interests of the stockholders) ahead of theirs. They are putting
their own interests first. If they didn't see the meaningful
arbitrage between pre-deal market value and what they can squeeze
out of Dell, they wouldn't do the deal in the first place. But if
they see gains that could be obtained through better management or
by liquidation in whole or in part, they're duty-bound to realize
those gains for us, not for themselves. That is what it means to be
a fiduciary.
WHAT'S MORE, BY
DOING a going-private deal, Michael Dell (by all accounts a
fine man) and his colleagues (all honorable men) are in an
absolutely clear-cut conflict-of-interest situation. They are, in
essence, bidding against their fellow shareholders. But they aren't
showing all their cards.
In all going-private
deals there are memos and other data showing the real value of the
company and how much money will be made by the insiders and those
who join them and finance them. Stockholders outside the buyout
group don't see this material. This is yet another assault upon
fiduciary duty -- withholding material information about a vital
transaction–and, again, trading on that information.
The whole concept of
fiduciary duty exists to prevent such things as going private, where
the guardians of the trustors take advantage of their superior
knowledge to make money off the trustors.
Supposedly, such things
as subcommittees of independent directors protect the stockholders.
But if you believe in truly independent directors when immense sums
are lying on the directors' table, you're a hopeful and optimistic
human indeed. And one who perhaps hasn't spent much time among
public companies' top managers.
One of the smartest
businessmen I know, a former high executive of a publicly held
entertainment company, once asked me: "What is the first duty of a
corporate CEO?"
"Well, to maximize the
utility of the shareholders," I naively answered.
"You poor child," he
said. "No, the CEO's first duty is to make himself as rich as he
can, as fast as he can, with the shareholders' money." I'm sad to
say that decades of observation have confirmed that his conclusion
is correct all too often.
Finally, some will say
that the price paid to the outside stockholders in a going-private
transaction is investigated and approved in a "fairness letter" from
a reputable investment bank (an interesting concept in itself). My
experience, when digging into these deals, is that the fairness
letters are done by summer interns or neophytes at the firm, match
whatever price management cares to pay, and rarely stand up to
careful examination.
For those who say Dell
shareholders are getting more than the pre-deal market price, here's
a simple suggestion: Allow those who wish to take the cash to do so
and run. Let the others join the buyout group and participate on the
same basis as Michael Dell and his pals.
That won't happen. In
going-private deals, where really big money is on the table, there
is one ironclad law for managers: The constant, me, is
always greater than the variable, u.
BEN STEIN is an actor,
writer, and TV and print commentator on business, finance and
economics. A graduate of Yale Law School, he taught law at
Pepperdine University for many years.
