In negotiation, your best source of power typically is your “best alternative to a negotiated agreement,” or BATNA.
In all likelihood, Dell Inc. founder Michael Dell found himself facing such a BATNA analysis when he wanted to take the computer giant private. Now fully private, let’s look back at the saga that brought Dell Computer to the bargaining table and how its best alternative to a negotiated agreement informed its negotiation strategy.
Back in February 2013, Dell and private-equity firm Silver Lake Partners announced a deal to buy the company for $13.65 a share. The deal faced one obstacle after another, including the threat of a Dell shareholder revolt, the threat of a higher offer from another private-equity firm, and efforts by billionaire activist Carl Icahn to convince Dell to pony up a higher bid. The overarching question: whether Dell would be getting a steal deal, and whether there was any way to stop him.
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Dell shareholders had been due to vote on the deal on July 18. But that day, the company postponed the shareholder meeting by six days, reportedly because there did not appear to be enough votes to close the deal, reports Ronald Barusch in the Wall Street Journal. Dell may have been working behind the scenes to win over shareholders.
In an analysis of Michael Dell’s options, Barusch offered the following possibilities:
1. Keep the deal alive:
To address shareholder concerns that Dell would be buying the company when it is at its most vulnerable and later making a tidy profit at their expense, Barusch recommended that Dell offer so-called “schmuck-insurance.” Less-colloquially, Dell could offer a “contingent value right,” or the right for shareholders to later obtain a payment in the event of a Dell sale or independent public offering. Such contingencies can help negotiators reach agreement by eliminating the need to agree about the likelihood of a future event, such as a dramatic rise in Dell’s value.
Instead, through a contingency, they essentially place a bet on what will happen.
2. “Fight to the death” with Carl Icahn and his partner, Southeastern Asset Management:
If Dell shareholders voted down the deal, Icahn threatened to attempt to replace Dell’s entire board of directors and implement a plan that would involve borrowing and paying out cash to shareholders. Given that Dell had a 16% stake in his company, he “had a leg up in that fight,” according to Barusch.
3. More aggressive moves:
Theoretically, if the buyout were voted down, Michael Dell could choose to purchase additional shares in Dell in an effort to solidify his position against Icahn.
Through this type of careful BATNA analysis, Michael Dell would be in a position to respond quickly and, if necessary, regroup without missing a beat.
In the end, the buyout went through. And in June 2016, according to Fortune, a “Delaware court ruled that Dell Computer’s then-CEO Michael Dell and Silver Lake Partners underpaid shareholders by about $6 billion, or 22%, when they took computer giant Dell Inc. private in 2013.” They write, “Michael Dell’s group paid represented a 28% premium over the stock price ($10.88) on the day before news of the merger deal first leaked to the press in January 2013, and a 39% premium over the 90-day average stock price ($9.97) before that date.” The overpriced $31 billion dollar deal occurred amidst a decline in PC sales.
How do you overcome barriers in agreement? Share your story in the comments.
Claim your FREE copy: BATNA Basics
Discover how to unleash your power at the bargaining table in this free special report, BATNA Basics: Boost Your Power at the Bargaining Table, from Harvard Law School.
Interesting article. I am not sure I understand what the last paragraph of this article intends to convey. The last quote from the June 2, 2016 Fortune article seems to be missing some context (TLDR – Fortune’s article states that the court ruled that shareholders had been underpaid by 6bn but the Michael Dell group did nothing wrong – the Delaware law concept of fair value is not equivalent to the economic concept of fair value). The quoted sentence starts with “Remember that”, etc. The final sentence here talks about an overpriced $31bn deal, but that number includes the 6bn the court said was underpaid. Dell is looking to go public again this year through buying out DVMT holders.