Both BMC and Dell are in the process of going private and at the core of both firms’ strategies is a critical need to embrace a world that is more defined by Amazon Web Services than Intel, IBM, or Microsoft. To make this flip, both firms will need to make huge bets on new technologies, buy market share, and more aggressively change not only their product sets but the ways they sell and provide services. BMC leads Dell into this process because it didn’t have the damaging impact of Carl Icahn slowing its process down. BMC will likely be first to showcase the benefits and the problems associated with this change.
The first problem, based on questions from its analyst call, which BMC has experienced, is a fear that excessive cuts would adversely impact the company’s ability to provide for customer needs or provide contracted for services. This fear is largely unfounded, but it does showcase one of the problems of going private, that the voice that is typically connected to the financial reporting is lost, and with it goes potential control over the corporate image.
Let’s look ahead at going private for both BMC and Dell.
This is not an inexpensive process, as Michael Dell can personally attest, but the reasons behind it are both financial and founded in a need for different governance. From a financial perspective, compliance has become a massive cost for corporations trading in the U.S. While this market still appears to provide the most ready cash, the burden of assuring financial reports that no one is providing insider information is massive and contains personal risks for the executives. Any time they share future plans with a consultant, the risk of an insider risk charge that could devastate the executives financially named in the action is present. The removal of this burden is one of the benefits of going private.
However the bigger reason to take a company private is to be removed from the pressure of having to meet the needs and expectations of financial analysts who want to see strong financial results but could care less about strategic initiatives. CEOs, like HP’s old CEO Mark Hurd, who play to these expectations can gain short term benefits by massively cutting costs, increasing dividends, and stock buybacks, but in so doing, they can bleed the company of the people, capability, and resources the firm will need to grow or even survive.
Moving out from under this umbrella gives the executive team more leeway and potentially less pressure to do stupid things.
The problems and risks of going private are numerous. Corporate Raiders or existing investment houses may have their own agendas and use the process to deplete the company’s resources. The new owners of the company may have their own agenda and will have a much stronger voice than the financial analysts had. They can force you to cut deeper than you otherwise would in order to profit from a fast IPO, and the company may inadvertently lose its corporate voice.
Of these three, it is the last that is the more likely to adversely impact BMC and Dell because it is often unexpected. The first two problems are generally anticipated and the funding partners are hand selected to avoid. However, corporate messaging is often tied to the CEO’s quarterly reports, which are eliminated by this process. While the financial analysts don’t really need to be engaged, the media will see a vacuum where this messaging used to exist and they are more likely to fill it with the messages they get from the firm’s still public competitors. Now companies can execute a more PR focused alternative venue, but often don’t because they simply aren’t aware of what it is they lost. That means the perceptions surrounding the company are likely to decline if this isn’t mitigated.
Given the firm’s need to retain existing customers and acquire new ones and competitors will be eager to take advantage of their silence losing this voice can be both painful and expensive. For instance, several years ago Microsoft, even though they didn’t go private, effectively defunded their corporate marketing and analyst relations efforts several years ago and this likely directly contributed to their CEO’s premature departure. The firm was unable to balance the bad news in regard to mistakes with the good news surrounding successes and one of the most powerful executives in the world lost his job. There is a lesson in all of this.
Wrapping Up: FUD Central
When a company goes private, the largest risk is the aggressive creation of FUD (fear, uncertainty, and doubt) surrounding the company’s products and services. This means the marketing requirement for the company actually goes up, because the quarterly financial reports are eliminated, which gives competitors a stronger voice on the firm’s future than the company itself has—unless this change is mitigated. Both Dell and BMC have strong investors and a detailed plan to substantially change, but unless customers are regularly sold on the plan and execution, the problems associated with the change will drive them off, creating expensive problems for the firms. Such problems could make the FUD a reality.
Perception is reality and we’ll hope that neither BMC nor Dell makes this mistake, but it should be relatively obvious if they do. In a very real sense the only real fear for either firm is the inability to mitigate fear in customers or the private investors, both of whom could react badly and cripple the efforts.