Squeeze outs occur during mergers and acquisitions of public companies, and are a means by which a 90%-owned subsidiary can be forced to merge with its parent company, with subsidiary shareholders compelled to take cash for their shares. In such situations, the consent of the minority 10% is not required. Such mergers are governed by Delaware corporation law.
Q. [Dell news]. But going private isn’t really so easy, right? It’s not just a matter of putting a number out there and getting the board to say yes.
A. Correct. In practice, its really very tricky, which is why a lot of larger deals fall apart before they get done. Folks who own the shares today may not leap at the price the PE and management are putting out there… after all, if that’s what they’re willing to pay, they must think its worth more than that, right? But once you get to 90% saying yes, you can “squeeze out” the last 10% to get your deal done.
Q. How does that work exactly?
A. The buyers set up a company to do the acquisition. It makes an offer for the shares. Once it gets to 90% ownership, the target can agree to merge with the acquirer, and those who don’t sell get squeezed out: they’re mandatorily redeemed out of their shares for cash equal to the tender amount.
Q. So I guess that the fact Michael Dell himself might want to do this deal would make it easier to get the necessary number, because he already owns 15%…
A. Right, easier to get approval, and easier to finance. But, on the flip side, it raises a lot of fiduciary issues because he’s got so much stock and has so much control at the company that he might be considered a “controlling shareholder” who actually owes fiduciary duties to the existing public holders… that complicates the picture. Delaware courts are pretty protective of minority shareholder rights when a controlling shareholder leads a going private transaction.
Q. And the whole question about price really is sort of interesting… if the PE firms really have to pay up full value for the company, why do the deal?
A. Frankly, it’s a good question. Obviously Dell has to change its business model– to get away from PCs and focus more on the cloud and SMEs– but it doesn’t really have to go private for that. Sometimes going private helps because you can go dark for a few quarters while you fundamentally retool the business, but that doesn’t really seem necessary here. Certainly one factor is simply the dry powder syndrome: there’s a ton of money out there to do giant deals, and this fits the bill.