T. Rowe Price Group Inc. announced Monday that it will pay up to $194 million into funds affected by the Baltimore mutual fund manager's botched vote on Dell Inc.'s buyout in 2013.
T. Rowe had vocally opposed Dell founder Michael Dell's plan to take the computer company private, but inadvertently backed the deal because of an administrative error. The mistake cost T. Rowe the right to join other investors in suing Dell for a higher price.
A Delaware judge ruled in May that Dell underpaid by about $6 billion when it bought out shareholders in the $25 billion deal.
The payout represents an effort by T. Rowe to make things right with fund investors. Analysts said T. Rowe could have faced a class-action lawsuit from aggrieved investors.
"T. Rowe Price has a long history of putting our clients' interests first, and that is what we are doing here," CEO William J. Stromberg said in a statement. "Since this situation began, our focus has been on securing fair value from the Dell buyout for our clients."
Fund investors will not get a check or an individual cut of the payout. Rather, the money will go into funds that held Dell shares, including the Equity Income, Science & Technology, and Institutional Large-Cap Value funds, and the Equity Income Portfolio.
Any current shareholders in those funds will benefit from the deal. Shares will be worth more, which will be reflected in higher account balances for investors.
T. Rowe did not disclose the number of clients invested in each of its funds.
The Equity Income fund and portfolio and the Science & Technology Fund are primarily retail investments, meaning shareholders are individuals. The Institutional Large-Cap Value Fund is primarily held by institutional investors.
The Equity Income and Science & Technology funds held the vast majority of the 31 million Dell shares in T. Rowe funds and accounts, with 16.5 million and 7 million shares, respectively.
T. Rowe had argued that the proposed Dell buyout undervalued the company and voted against the plan in an initial vote.
But when the deal was renegotiated, the company's automated system for informing shareholders how to vote defaulted to a "yes" vote, according to court records. Company officials have acknowledged that they failed to manually change the settings to reflect that a "no" vote should be cast.
The cash payout, which T. Rowe will take as a one-time write-off this quarter, will be a hit to the company's 2016 books, but analysts said it's the right move in the long run.
"For T. Rowe Price, it's the cost of doing business," said Greggory Warren, a senior stock analyst with Morningstar Inc. "They made a mistake, they cost fund investors money, and they're doing the right thing."
The deal is as much about T. Rowe's reputation as it is about money, Warren said. The company could have waited for investors to file a class-action lawsuit and then tried to fight it. Making a deal upfront leaves more money for investors because there are no lawyers to pay, and sends a message about T. Rowe's integrity, he said.
The $194 million payout comes from the company's $1.9 billion in cash and discretionary investment holdings.
T. Rowe won't have to borrow to make its payout, which means the company's credit rating won't suffer, said Erik Oja, an equity analyst with S&P Global Market Intelligence.
More immediately, the write-off might sting. T. Rowe expects the move to reduce net income, after tax, by about $118 million for 2016.
The company reported $1.9 billion in operating income in 2015, and analysts expect operating income of $1.8 billion this year.