Thursday, July 25, 2013

A Voting Rule Where Turnout Matters

One of the financial stories I have been following is the leveraged buyout offer of Dell Computer by founder Michael Dell and private equity firm Silver Lake Partners.  Some background from The Economist:
THE fate of one of the world's iconic tech companies is in the balance. On July 24th shareholders of Dell will be asked to vote on a proposed $24.4 billion management buy-out put together by Michael Dell, the company's founder, and Silver Lake, a private-equity firm. If the deal is approved, Dell will slip into the shadows of private ownership, where Mr Dell and his allies are betting they can revive its fortunes. If the transaction is vetoed, the outcome is likely to be a messy stalemate that will deepen Dell’s woes. 
The vote will be a close run thing. Initially due to take place last week, it was postponed by Dell’s board when it became clear that Mr Dell and his supporters needed more votes to carry the day against Carl Icahn, an activist investor, and a bunch of investment firms such as Southeastern Asset Management, who believe that Mr Dell’s offer is too low. Mr Icahn has floated a plan that would involve Dell retaining a stockmarket listing and taking on debt to pay those investors who wish to sell $14 a share for their holdings. He is also proposing to offer a warrant with a strike price of $20, for every four shares held.
There have also been concerns over how large institutional investors like BlackRock and State Street would vote.  If you're interested in learning more, you could spend half a day reading about the intricacies of the deal.

Today's news, however, is more to the point.  Apparently, Michael Dell and Silver Lake delayed the vote on the buyout proposal, but because of their voting rules. Abstaining from voting would count as a "no" vote, and that was going to matter for the outcome of the vote.  To maneuver a change in the voting rules, Dell/Silver Lake sweetened their offer.
Still, the new bid may amount to a nickel-and-dime attempt at changing the goalposts late in what would be one of the largest private equity buyouts in history. The revised offer of $13.75 a share increases Dell's buyout price by approximately 0.7% or $150 million. 
Silver Lake and Michael Dell are asking that along with the increased offer, a special committee conducting Dell's sale agree to revise the merger agreement so absentee votes at the shareholder meeting aren't counted against the takeover consortium. It is reported that about 20% of Dell's shareholders were absent the July 18 vote, creating a roadblock for the private equity buyers.
According to the Wall Street Journal, the fraction of no shows was more like 27% when the buyout group was expecting 10-15% no shows.  Not surprisingly, turnout really matters in elections where you vote "no" if you don't show up.

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