PC Industry Fights to Adapt as Tablets Muscle In

Like the mainframe, which was said to be dead decades ago but has remained a meaningful business, the PC will almost certainly cheat death. True, mobile devices like the iPad will continue to gore PC sales. Those mobile devices, though, will most likely never satisfy spreadsheet masters, film editors and other workers who depend on multiple screens and the precision of a keyboard and mouse.

Still, there is a strong view among many longtime tech executives that the PC’s relevance will steadily diminish.

“In my humble opinion, the PC as we have known it is in a continuous decline and being relegated to a utility device for businesses,” said Hector Ruiz, the former chief executive of Advanced Micro Devices, a company that makes chips for PCs and other devices.

The mood around the PC industry has become increasingly glum. The business is effectively in a recession, and there is no upturn in sight. During the second quarter of the year, global PC shipments fell around 11 percent, for their fifth consecutive quarter of declines, the worst downturn since the advent of the PC more than 30 years ago.

Intel, supplier of the chips in most PCs, and Microsoft, which makes the Windows operating system on the vast majority of those machines, have delivered disappointing financial results. An overhaul of Microsoft’s software, Windows 8, did not lift sales and may have made them worse.

The once-mighty Dell, deeply weakened by the PC slump, is mired in a struggle with shareholders over a plan to go private, seeking relief from investor pressure. In their bid to take the company private, Michael S. Dell, the founder, and the investment firm Silver Lake have argued that they would turn the company into a corporate software services provider. A vote on Dell’s future is expected this week.

While sales of PCs to businesses remain steady, demand among consumers has plunged, largely because people are instead buying iPads, Kindle Fires and other tablets.

Still, a reality check: more than 300 million PCs are expected to be shipped this year globally. That is a lot of widgets for a business that has caught a cold.

Tablet sales are growing explosively. This year, there are expected to be more than 200 million shipments of the devices, which will for the first time exceed shipments of notebooks, the largest category of PCs, estimates Gartner, the research firm.

Steven P. Jobs, the Apple chief executive who died in 2011, predicted several years ago that PCs would become something like trucks, workhorses used by many people but outnumbered by tablets, the cars of the technology business. (The analogy is somewhat undercut by stats: the most popular vehicle in the United States for several years has been a truck, the Ford F-150.)

One theory is that tablets are leading PC shoppers to postpone purchases of new computers, perhaps by a year or two, but that eventually people will be ready for a fresh machine. “Replacement cycles are being pushed out,” said Toni Sacconaghi, an analyst at Bernstein Research.

A more pessimistic view is that a lot of the consumer demand for PCs will never return. Daniel Huttenlocher, the dean and vice provost of Cornell University’s new New York City technology campus, said consumers began buying PCs in big numbers beginning in the 1990s largely because no better device existed for getting on the Internet.

But the PC, he said, was always better suited as an office machine for the production of documents, presentations and other work. In his view, tablets are better for the consumption of content, whether that is watching Netflix or surfing the Web.

“There are way more consumers than producers, period, even in a world with lots of user-generated content,” Dr. Huttenlocher said.

In the first quarter, 53 percent of computer shipments were to the consumer market while 47 percent were to the commercial market, estimates the research firm IDC.

DealBook: Ways to Muscle Out Competing Deal Offers

Harry Campbell

The $1.19 billion AT&T acquisition of Leap Wireless International is an illustration in how far bidders and acquisition targets can go these days to protect against competing offers.

In AT&T’s merger agreement with Leap Wireless, two provisions in particular make it harder than normal for a competing bid to succeed.

The first is a so-called force-the-vote clause. Merger agreements typically allow a target company’s board to terminate a deal to accept a superior competing bid. But Delaware law permits the two parties in a merger deal to agree that a shareholder vote must be held even if a competing bid emerges.

Even though such a clause is legal, only in 9.6 percent of public acquisition agreements since 2010 have contained a force-the-vote clause, according to FactSet Mergermetrics.

The reason is simple expediency. If a higher bid emerges, it is unlikely that the target company’s shareholders will vote to approve the original deal. Requiring a shareholder vote is thus only delaying the inevitable no vote.

In this case, though, AT&T and Leap have paired a force-the-vote provision with a voting agreement, making it a more powerful. MHR Fund Management, an investment fund headed by Mark H. Rachesky that holds about 30 percent of Leap’s shares, has irrevocably agreed to vote in favor of AT&T’s bid. When I say irrevocably, I mean it. MHR’s voting agreement does not give the fund an out if a higher bid comes along.

So even if a competing bidder comes along, AT&T can force a shareholder vote to be held – and it has already locked up about MHR’s vote.

Still, this does not mean that it is a done deal. If another bidder comes along, it could still sway the rest of Leap’s shareholders, or at least enough of them to prevent Leap from exceeding the t50 percent mark needed to complete the deal with AT&T.

The deal protection provisions thus have two functions. First, the clauses deter marginally better bids. Second, they extend the time period for any competing acquisition to be agreed upon and completed, perhaps providing a second deterrent.

If a competing bid is made and ultimately accepted, however, Leap has to pay AT&T a termination fee of $46.3 million, or 3.9 percent of transaction value. According to FactSet Mergermetrics, in the last 12 months, the average termination fee was 3.36 percent of transaction value. Though not a big difference from the average, the higher percentage offers additional protection.

The merger agreement also limits the Leap board’s ability to change its recommendation if an “intervening event” occurs – that is, if something unexpected happens that makes the AT&T bid no longer in the best interests of stockholders. The key here is that the event must be wholly unexpected.

The example practitioners use for what constitutes an intervening event is something like the target company discovering a gold mine under its headquarters, thereby suddenly making the current bid woefully underpriced. But how often are gold mines actually discovered under a company’s headquarters?

While the gold mine example is extreme, this type of clause has never been invoked in the history of takeovers. It is also probably meaningless in this case. The effect of the protection provisions is in some ways a prediction by AT&T and Leap about the likelihood of a competing bid. One possibility is that AT&T, worried about the competitive consolidation and furious rate of bidding for companies in the wireless market, demanded these deal protections.

Leap may have shopped itself, and its board may be fairly confident that another bidder was not out there. The directors could therefore agree to these stronger deal protections, safe in the knowledge that, though stronger than normal, they might not matter much.

In other words, the deal protections here may be appropriate given the state of the market. The fact that MHR, which is a pretty sophisticated investor, also agreed to these protections supports this hypothesis.

That’s the rub about deal protections. Over the last several years, they have become ever stronger and more intricate, a phenomenon known as lockup creep. But whether this is being driven by target companies or bidders – and whether the trend signals a fuller shopping of the company – can be difficult to determine, even when the negotiations are disclosed.

As for the legality of these deal protections, they are unlikely to be struck down by the Delaware courts. In fact, the protections here show how the law has changed in Delaware in the last decade.

The reason is the long slow death of Omnicare. What is Omnicare, you may ask?

In 2003, NCS Healthcare negotiated to sell itself to Genesis Health Ventures in a locked-up deal. A majority of the NCS stockholders irrevocably agreed to vote in favor of the Genesis acquisition, even if the NCS board later changed its recommendation because of another competing bidder. Since the agreement also contained a force-the-vote provision, this meant that the Genesis acquisition was a fait accompli.

These arrangements were challenged by Omnicare, a competing bidder, which offered significantly more money for NCS. In Omnicare v. NCS, the Delaware Supreme Court delivered a 3-to-2 split decision to strike down the voting agreement. The court ruled that such an agreement made the deal certain, and therefore breached the board’s fiduciary duties.

The Omnicare decision was quite controversial, criticized by practitioners and academics alike. At some point, an auction to sell a company must end, and in this instance, NCS had thoroughly canvassed the market and would have faced bankruptcy without the Genesis deal.

But the Omnicare decision was slowly whittled away by the lower Delaware courts. In Miami v. WCI Steel Inc., then-Vice Chancellor Stephen P. Lamb held that the ruling in Omnicare was not implicated when a merger was then approved by the stockholders of WCI by written consent the very same day that the board also approved the deal. Today, it is generally thought that the Omnicare ruling is dead, and that if the Delaware Supreme Court again took up the matter, it would overturn its own decision.

All of this is relevant when reviewing the deal AT&T reached with Leap Wireless. Given the state of Omnicare, this type of lockup – a force-the-vote provision coupled with a voting agreement for less than a majority of a target company’s shares – is undoubtedly acceptable. In the wake of the death of Omnicare and the reduced court scrutiny it brought for deal protections, practitioners have felt much freer to push the bounds – negotiating more aggressive deal protections. Expect to see deals like this again and again in the future.

But are these protections being negotiated simply because the parties can? Or are they being used because the target company believes these lockups provide an incentive for the first bidder to pay up and no other bids are out there? The matter could be put to the test in the AT&T-Leap deal if a second bidder emerges and attempts to overcome these deal protections.