U.S. Court Ruling Says Dell Buyout Underpriced By 22%

“I Know What You Did Last Summer”.

Reminded of the famous 1997 slasher movie? We are not going to talk about it here of course. But the reason why we mention it here is that the Delaware court seems to have determined what Michael S. Dell and investment firm Silver Lake Partners did three years back when they took Dell private. (Read: Dell Goes Private in $24.4B LBO)

The court yesterday ruled that the two underpriced their Feb 2013 $24.4 billion deal by almost 22% and therefore have to make up for the losses to shareholders along with interest.

Travis Laster, vice-chancellor of Delaware’s special corporate court, said in the ruling that “The sale process functioned imperfectly as a price discovery tool, both during the pre-signing and post-signing phases.” The court determined that the fair value of the deal should have been $17.62 per share instead of $13.75.

Therefore, it has asked Dell and Silver Lake to compensate for losses to dissenting shareholders along with interest. Originally, investors were seeking appraisal for about 40 million shares with some claiming a fair price of as high as $25 per share.

However, the court ruled that only 5.2 million shares were still eligible for appraisal. This came as a major disappointment for mutual fund manager T. Rowe Price, given that his firm’s 27 million shares in Dell were disqualified for the appraisal.

Although Price had been one of the biggest opponents of the deal and had even publicly criticized it, he mistakenly voted in favor of the transaction. As a result, the disqualification has cost over $100 million for his firm.

As per the court ruling, Dell will have to cough up a little over $20 million to compensate shareholders.

Notably, the deal was opposed from day one for being underpriced, followed by controversies related to the changing of voting rights to safeguard the offer from being blocked. Further, various activist investors including Carl Icahn as well as shareholders openly disapproved the move and highlighted the conflicting interests of Mr. Dell who was playing both the buyer and the seller.

Presently, Dell is in the midst of acquiring EMC Corp. (NYSE:EMC) for $67 billion, which is being considered as the largest-ever tech acquisition. (Read: Dell Acquires EMC for $67 Billion)

While some may have misgivings about the recent court rulings’ impact on the acquisition, we believe that it will have negligible impact on Dell’s financials while finally clearing up matters with respect to the going-private deal, thereby making it easier to close the ongoing transaction.

EMC currently carries a Zacks Rank #2 (Buy). Other stocks worth considering in the broader technology sector include Facebook Inc. (NASDAQ:FB) , Silicon Motion Technology Corp. (NASDAQ:SIMO) and Paylocity Holding Corp. (NASDAQ:PCTY) , all sporting a Zacks Rank #1 (Strong Buy).