For the last several years, Dell has been trying to find a way to go private with a Leveraged Buyout (LBO). There are a number of reasons for this, and we’ll cover a few of them but the larger issue is what it will do to the firm as a vendor. It will change the company significantly and remove some of the warning process for that change.
The “Why” Behind Dell’s Move
Going public opens up a massive amount of cash for investment and growth, but it also creates a massive series of costs that can dramatically reduce profitability and agility. It can take over 20 percent off the bottom line to cover compliance and legal costs of being a large public company, and it opens the firm up to criticism by financial analysts that focus excessively on tactics. For instance, even though Mark Hurd was clearly bleeding HP to death, his strategy at HP was rewarded because of the near-term benefits, even though it assured the ugly future that the company is now experiencing.
In addition, the reporting requirements and restrictions on insider knowledge prevent the firm from seeking advice broadly on acquisitions and make it difficult to do them successfully. For instance, when Microsoft approached Yahoo as an acquisition, it was massively devalued, which worked against the deal. The deal failed. In effect, the company incurred the cost of acquiring Yahoo through a devaluation that hit before the acquisition so they never got any benefit thanks to being public.
Dell clearly anticipates making additional acquisitions and needs to be free to make big strategic gambles, even if it means sacrificing short-term profits if it is to shift to new market opportunities. As a private company, it would be vastly freer to do that.
Change in Dell
Right now, Dell has two masters, its customers and its investors. Of the two, the second set tends to be the most visible and vocal at an executive level because they both speak through the board and through the media. By eliminating the public investors, the customer by default gets more influence and Dell is free, once it adjusts to this change, to respond in a way that favors those customers. Also interesting is that private investors that enter into a deal like this tend to do so for long-term benefits. They tend to be looking for more of a long-term investment and while they may also require dividends (depending on who they are), they aren’t looking to trade the stock actively.
That means that unless the company is undergoing cash shortages, which is unlikely given Dell’s massive reserves, even after a leveraged buyout, they are likely to keep their hands off the company. Those that do engage tend to be more expert about the business so their help and advice tends to be more useful. All together, this means that Dell should, over time, adjust its tactics more sharply toward customer satisfaction than it could as a public company and its strategic moves will increase.
This doesn’t mean Dell will have a stronger vision than it does now, but it does mean it can execute more sharply against it. If it gets it wrong, it will get into trouble more quickly but it’ll be less likely to ignore the mistake because it won’t have the fear of being pilloried by the financial analyst community. This last may represent the greatest benefit to the company, but some uncertainty to the customer, in that the firm will begin to feel free to make larger gambles. With both Microsoft and Google going ever more vertical, the need to move more aggressively in a strategic fashion has never been greater.
Wrapping Up: The Benefits Are Clear but There Is Risk AND Opportunity
It is clear that a move to do a leveraged buyout would likely result in a more customer-focused and agile Dell. However, with that agility comes some risk because many moves may be harder to determine. On the other hand, with the limits associated with insider trading removed, companies can get closer to Dell than they have ever been, suggesting that those that fully understand this change could get unprecedented access to future plans and a much stronger voice than with a public company. Played aggressively, this move not only results in a potentially vastly stronger Dell, but an unprecedented opportunity to gain access to a critical vendor and gain competitive advantage yourself. The only remaining question is whether Dell can pull off one of the largest LBOs ever attempted.