In one of the worst kept secrets out there over the last few weeks, Dell announced this morning that it will go private in a deal with Silver Lake Partners, Microsoft, Michael Dell’s investment company, and Michael Dell himself. The question is, is this better or worse for Dell? Based on the way Wall Street views Dell, its competitive position, and its enterprise growth ambitions, this is the right move for Dell. I want to break down some of the reasons why a private Dell is a better Dell, starting with secrecy.
Public companies are bound by SEC disclosure regulations that say they must make material changes to the company public within a reasonable amount of time. Literally, any time public companies makes a material investment, an officer or director buys or sells stock, a layoff happens, misses quarterly guidance, etc., all must be disclosed.
It also has annual and quarterly disclosure obligations as well in the forms of 10-K (annual) and 10-Qs (quarterly). These 10-Xs aren’t unimportant as they give insights into profits margin structures, product costs, net pricing, discounts, major suppliers, major customers, major contractual commitments, business risks, legal risks, etc. Having run competitive analysis teams, the first place the teams would start with were the SEC disclosures as you can pickup 75% of the needed information there. The information is accurate, too, because if it’s not, companies can be subject to fines and even imprisonment of officers. This risk is why these documents are left to the CFO and chief legal counsel, signed by the CEO, and not left to the marketing.
A private Dell could fly literally under the radar screen of competitors.
In addition to being secret, private companies are faster, as SEC regulations described above slow a company down. Public companies spend a lot of time asking for permission and insights from stakeholders like the SEC, directors, shareholders, accountants and a lot of lawyers. Lots of lawyers….
Private companies still have boards, lawyers, and accountants, but there are a whole lot less of them. There are a lot less steps, too, as you don’t have to deal with the SEC. One good example are acquisitions. It literally takes 5X the time as a public company to make a najor acquisition as it does a private one. Divestitures are another good example. The market typically needs months of pre-conditioning before major moves can be made. Otherwise, the market could hammer you. This means months and months of hints, planned leaks, etc. to get people ready for a major move. If Dell decided to exit or sell the PC business, for example, they would need to pre-condition everyone. Look at HP and what happened to what they needed to disclose that they were “exploring options” with PSG.
A private Dell would be a faster Dell.
Publicly-traded companies are under the minute, hourly, daily, monthly and annual scrutiny of the Wall Street trading machine. Financial analysts set expectations on nearly financial vector and make these expectations public. After earnings disclosure, the press machine kicks in where you see headlines ranging from “beat”, “meet” and “fell short” of expectations.
In response to going through the Wall Street wringer, companies pander to them by doing everything they can to “market” to them. Companies many times make bad long-term business decisions to meet those expectations.
Hitting revenue is a great example. If a company is short on revenue going into the end of the quarter, the CEO, COO and CEO ensue to hammer the business units and sales to hit their numbers. This makes sense as commitments need to be made, but many times those end of quarter deals aren’t the best deals financially. Customers are trained by the cycle and know they can get better deals by doing business at the end of the month. To get the business, companies will do anything from cutting prices, pay for shipping, extend payment terms and stuffing the channel with more product than it needs. This may be good to make the quarter, but not necessarily good for long term profits.
Another example is layoffs. Many times companies will plan, announce, and execute layoffs just to show Wall Street they are serious. Wall Street loves layoffs… just ask your CFO. The problems is, many times the layoffs weren’t really needed and the people normally cut are those working on future products and initiatives, the future life-blood of the company. The first people to go in a layoff are anyone not directly tied to today’s revenue, which limits future growth, not to mention the personal toll it takes on families and employees.
A private Dell will have a lot more business flexibility.
There is a lot of upside for a private Dell, namely increased secrecy, speed and business flexibility. It’s not all wine and roses, though. Private companies need to spend more on marketing if they want to continue to be top of mind in awareness, familiarity, and even to drive preference. Sure, it’s great not to be in everyone’s face every second of trading hours, but you can’t fall off a cliff either. Incenting employees become a challenge as well, as you can’t pump publicly-traded stock options out. Like Twitter does today, there can be an internal “brokerage” but the process is just so much more complex. Dell stock hasn’t done well in a decade so it’s not all downside for employees, but they will need to compensate differently for the employees to share in the upside.
Net-net, this is a really good move for Dell. Given the lost love with Wall Street and the public markets, there’s little downside. A private Dell will be better able to complete their enterprise transition, do it faster, and compete more fiercely with HP, IBM and Cisco. To smooth the transition, they need to make some very quick announcements regarding their PC business and their commitment level, otherwise their competitors will pick them apart.