Tuesday, April 2, 2013
So it started yesterday with a piece in AllThingsD and then it appeared again this morning in an Andrew Ross Sorkin piece in The Dealbook. I know it can be a cynical business, but perhaps we are letting our cynicism get the best of us. What am I talking about? The developing argument that Dell's agreement to cover Blackstone's bidding expenses during the go-shop period is somehow nothing more than a ruse, a trick to get us all to believe that there really is a bidding contest for Dell. Sorkin characterizes the reimbursement of Blackstone's expenses as "a whopping $25 million." Whopping? On a $20+ billion PE deal? C'mon, it's a fraction of a fraction. Unless they are going to drop it in my bank account, $25 million isn't a lot of money.
First, I totally understand the cynicism. While the Dell transaction is playing itself out, the big PE players have been in court in MA defending against charges that they conspired to fix the acquisition market by not engaging in bidding contests. Although the bigger claim was dismissed, it might help the industry if they could point to the Dell transaction and say, "See, we compete all the time!" I get that. So, it's not like I can really blame anyone for wanting to look closely at Blackstone's motivation for putting together an offer and seeking to get compensated for their time in doing so.
However, until now the cynics (me included) have been on the exact other side of this issue. We have hinted for a long time that go-shops might just be window dressing. Indeed, with a go-shop and matching rights in place, to the extent you believe PE shops look like common value bidders, it's unsurprising that they - by policy - don't engage in bidding contests. It's not a conspiracy, it just wouldn't make economic sense to be too aggressive in jumping bids. Overtime, they would expect to regularly lose to incumbents with more information or overpay for every contest that they won. That's a short road to out-of-business. So, cynics argue, go-shops provide a nice veneer of compliance with Revlon obligations while everyone knows what's really going on. (There's some good work from Guhan Subramanian that suggests we shouldn't be too cynical, but I'm on a roll, so let me go with it.)
How to overcome this problem and inject some life into the go-shop process? Well, if PE bidders share attributes of common value bidders, the only way to get a second bidder to agree to invest the time required to put together a bid that in the end may not win is to pay them to do so. Paying for second bids or covering their expenses makes them indifferent to the prospect of making transaction specific investments that they might ultimately lose because the incumbent bidder has more information. Now, they might still overpay - that's the risk of being in a common value business, but at least they won't risk losing transaction specific investments to incumbents with more information. The result should be more competition for sellers over time. Don't we want that?
Anyway, before this train gets rolling too fast, let's not be too critical of the Dell Special Committee for paying to generate a second bid that certainly would not have appeared without the compensation.