Flawed Bidding Botches Dell Deal

Dell has captured the headlines in finance recently, and for all the wrong reasons. Last Friday, shares of the stock fell to $13.40--a full $0.25 below the $13.65/share price offered by Michael Dell and Silver Lake, and $0.85/share lower than the buyout price offered by Blackstone. The plummet in price followed the announcement last week that Blackstone had decided to remove its bid to acquire the struggling computer company, and the announcement of an agreement between Dell and investing activist Carl Icahn that placed limits on Icahn's ability to acquire shares.

In the wake of the debacle, DealBook featured an analysis of what went wrong in the bidding process, focusing on the over-reliance by Dell's current board on mechanisms known as "go-shops." A go-shop is a device in buyouts that forces the target company to shop around for competitive offers after an initial bid has been made--essentially undercutting the power of first-movers in the bidding process.

The origin of the go-shop is in private equity, where firms would often team with private management to demand an exclusive bid. According to DealBook, "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."

However, often go-shops often lead to hollow and inflated self-perception by targeted companies, and can also limit the bidding process to two bidders at a time. This is exactly what happened with Dell, which first only negotiated with Silver Lake and KKR; then only Silver Lake and TPG; then, when Blackstone called in January, Dell "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."

Now, it appears Dell has no other options, and the walls are only closing in even faster with the recent revelation that the PC industry is shrinking even more rapidly than originally projected. The lesson here is that "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." Dell may still be a Fortune 50 company, but beggars can't be choosers.