The Capital Markets Initiative
March 2013
TO:
Interested Parties
FROM: Lauren Oppenheimer, Senior Policy Advisor; and
David Hollingsworth, Policy Advisor
RE:
What the Dell?! Why a Publicly Traded Company Chooses to Go Private
On February 5th, Dell Computers announced a $24 billion leveraged buyout that
would delist the company from the NASDAQ stock exchange. After smashing onto the
scene with an initial public offering in 1988 and achieving Fortune 500 status 4 years
later, Dell’s management has decided that being a private company is better than
remaining on a public stock exchange.1
Yet the deal won’t be complete without shareholder approval. Southeastern Asset
Management, Dell’s largest outside shareholder, is taking action to stop the deal
because the firm feels the buyout price is far too low. Other prominent shareholders
are also loath to the deal, such as T. Rowe Price. In fact, Blackstone and activist investor
Carl Icahn expressed interest in making a competing bid.
Why does Dell want to delist from a public exchange? And why are some
shareholders opposed to the deal? This paper will examine what it means to “go
private,” why Dell has chosen this route, and why some shareholders are objecting.
What does it mean to take a company private?
When a company goes private, it means that the company delists its shares from a
public stock exchange. A common method of going private is a leveraged buyout,
where a single large shareholder—or a small group of large shareholders—works with
company management to buyout the remaining shareholders, with the help of a
private equity firm. A private equity firm is a financial entity that invests in companies
that are not listed on public stock exchanges.2
Certain private equity firms specialize in leveraged buyouts and collect money from
investors. They leverage their funds by borrowing from other financial institutions to
buy or invest in companies they believe could be significantly more successful with the
right infusion of capital and superior management strategies. Leveraged buyout firms
have dominated the private equity industry recently. From 2001 to 2007, the private
equity industry grew tenfold, driven mostly by leveraged buyouts.3
The delisting of Dell is an example of a leveraged buyout. Michael Dell, who started
the company out of his University of Texas dorm room, owns 15.7% of the outstanding
shares in the company.4 If the deal goes through, he will partner with a private equity
firm to purchase the shares of all other shareholders.5 Mr. Dell will contribute $750
million from his investment company, while Microsoft will chip in $2 billion to further
its business relationship with Dell. The private equity firm Silver Lake will add $1.4
billion.6 The combined capital of these partners will be used to raise an additional
$13.75 billion of new debt in the market to complete the transaction.7 Dell was
offering shareholders $13.65 a share, which is a 25% premium over the share price
when the deal was reported on January 11, 2013.8
Why does Dell want to go private?
There are many demands public companies must meet that private ones avoid.
Public companies are expected to meet short-term performance goals, such as
quarterly earnings reports. This can make it difficult for the management of a public
company to focus on long-term strategic goals that can sustain and grow the
enterprise, particularly for a company struggling under competitive pressures. Many
companies have been led astray by focusing too narrowly on maintaining their stock
price in the near term. In addition, public companies have a multitude of disclosure
and compliance requirements that private companies do not have to face.9
At the same time, privately-owned firms can operate outside of the public
spotlight, focused entirely on what is required to improve the long-term value and
performance of the company. As The Financial Times reports, Mr. Dell explained,
“going private would give the company the ‘time, investment, and patience’ needed
to execute a turnaround.”10
Of course, this does not mean that public companies can’t make long-term
investments, or that shareholders will always impatiently demand immediate results.
Many public companies, like Google, maintain a long-term outlook and the benefits of
delisting will vary according to the specific circumstances of each company.
In fact, it is unusual for a company the size of Dell to go private; there are only ten
buyout deals in history that are larger.11 The Dell deal represents the largest buyout
since the Great Recession.12 Smaller publicly traded companies go private more
frequently. From 2002 to 2012, an average of 414 companies delisted from equity
markets for the purposes of going private (as opposed to going under) every year.13
What are the pros and cons of going private?
When done right, private equity firms can help companies run more efficiently.
They offer strategic advice and managerial expertise. They make capital investments—
including research and development—and assist in the expansion of new markets and
products. By readjusting overall strategy, realigning incentives, and restructuring
companies, private equity firms can make struggling businesses more productive and
valuable. Private equity firms profit when the companies they buy prosper. In some
circumstances, (as in the case of Dell) the pressure to meet quarterly performance
demands can make large, overarching changes difficult to accomplish at publicly
traded companies.
Third Way Memo
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In addition, the managers of a public company aren’t the owners, meaning they
may look after their own interests instead of maximizing shareholder wealth. Because
taking on debt requires fixed interest payments, managers may be more focused on
increasing the value of the company. Failing to make interest payments would lead a
company to bankruptcy, leaving managers without jobs.14 Of course, there are risks with taking a firm private. From July to December of 2012,
the average amount of debt added to the balance sheets of acquired companies was
five and one-half times annual earnings, which is similar to average debt levels in 2006
and 2007.15 It can be cumbersome for a company to get out from under the weight of
the newly acquired debt unless the private equity firm provides substantial value by
restructuring the company to operate more efficiently.16 Servicing the debt could
prevent the company from making investments that are necessary for a successful
turnaround. The higher the debt levels, the less money that is available for actual
restructuring, giving firms a lower margin of error in their strategic decisions.
Why does the deal require shareholder approval?
In a typical leveraged buyout, the management of a company works with either a
single large shareholder or a small group of large shareholders to take over the
company, with the assistance of a private equity firm. However, there is an inherent
conflict of interest in these deals. All of these parties—shareholder(s), management,
and the private equity firm—have an incentive to buy the company at the lowest
price.17 In addition, management has a vast information advantage over outside
shareholders because of their day-to-day experience in the firm.18
Given that the buyers have both more information and an incentive to lowball the
price, both the shareholders not involved in the deal and the board of directors of a
company are required to approve a buyout deal before it goes through. This approval
helps ensure the buyout price is fair.
In Dell’s case, some of their prominent shareholders not involved in taking the
company private have strongly voiced their displeasure at what they feel is a very low
price. Southeastern Asset Management thinks the company is worth almost twice as
much per share as what Dell is offering, submitting a detailed breakdown in their
regulatory filing.19
In fact, because it is often difficult to get widely scattered shareholders to act in
concert, some deals need the approval of an independent board in addition to the
approval of a company’s board and shareholders. These independent boards shut off
all contact with the buyout team once the deal is announced, and act as an
independent judge of the value of the deal to protect shareholders.
There is an increasing awareness of the conflicts of interest that are present in
these deals. The Dell deal required the approval of this type of independent board.20
This board approved the deal on February 5th.21 However, as the complaints from Dell’s
shareholders demonstrate, there is disagreement on how independent these boards
are in practice.
Third Way Memo
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Pricing deals is a difficult task, which is often why private equity firms with the right
expertise are involved. Good leveraged buyout deals return fair value to shareholders
while ensuring that company debt levels are sustainable.
Conclusion
A company goes public to raise capital by issuing shares that people can buy.
Going public has many advantages, but the price for raising that capital may be the
loss of control of the company to shareholders and short-term market pressures.
Companies may delist as their capital needs diminish and their need for control of the
company increases.
In Dell’s case, Mr. Dell and the company’s management felt the pressure to meet
short-term performance goals was hurting its ability to make long-term strategic
adjustments, and the company would be better off restructuring outside the glare of
public markets.
Of course, there are risks to going private. These deals often involve a significant
amount of debt, and if a company that delists fails to make strategic improvements
that significantly boost its performance, it may be crushed by its newly acquired debt
burden. In addition, due to conflicts of interest, it is important to ensure that
shareholders are protected and receive fair value for their investment.
For Dell, time will tell whether going private provided a critical lifeline or sped up
its demise.
Endnotes
1
“Our History,” Dell. Accessed on February 14, 2013. Available at:
http://content.dell.com/us/en/corp/our-history.
2
Martin Stein, Tony Kiehn, and Jennifer Danzi, “How Private Equity Really Works,” International
Imaging Technology Council, August 2007. Accessed February 14, 2013. Available at:
http://www.blackfordcapital.com/articles/How_Private_Equity_Really_Works_p1.pdf.
3
Ibid.
4
David Gelles and Henny Sender, “Daring $24bn deal to make Dell relevant,” The Financial Times,
February 5, 2013. Accessed February 14, 2013. Available at: http://www.ft.com/intl/cms/s/0/40f132ca6fbe-11e2-8785-00144feab49a.html#axzz2JrH3DEv7.
5
Ibid.
6
Andrew Bary, “The Dell Deal May Die,” Barron’s, February 9, 2013. Accessed February 13, 2013.
Available at:
http://online.barrons.com/article/SB50001424052748704372504578287960502012492.html#articleTab
s_article%3D0.
7
Ibid.
8
“Ex-Top Pc Maker: ‘Buyout plan grossly undervalues Dell’,” CNNtopnews.com, February 10, 2013.
Accessed February 15, 2013. Available at: http://cnntopnews.com/ex-top-pc-maker-buyout-plangrossly-undervalues-dell/.
Third Way Memo
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9
David Gardner, “Why Dell Decided To Go Private,” Fast Company, February 11, 2013. Accessed
March 1, 2013. Available at: http://www.fastcompany.com/3005689/why-dell-decided-go-private
10
Gelles and Sender.
11
Thornton McEnery, “The Biggest Private Equity Buyouts in History,” Business Insider, April 11,
2011. Accessed February 27, 2013. Available at: http://www.businessinsider.com/the-biggest-privateequity-deals-in-history-2011-4?op=1
12
Jill Priluck, “Dell 'buyout' marks waning of public company era,” GMA News Online, February 15,
2013. Accessed February 27, 2013. Available at:
http://www.gmanetwork.com/news/story/295062/economy/opinion/dell-buyout-marks-waning-ofpublic-company-era
13
“PE by the Numbers,” Fact Sheet, Private Equity Growth Capital Council, February, 2013. Accessed
February 27, 2013. Available at: http://www.pegcc.org/education/pe-by-the-numbers/.
14
Aswath Damodaran, “Capital Structure: The Choices and the Tradeoff,” QFinance. Accessed March
21, 2013. Available at: http://www.qfinance.com/contentFiles/QF02/g1xtn5q6/12/3/optimizing-thecapital-structure-finding-the-right-balance-between-debt-and-equity.pdf.
15
Mark Wirz, “Debt Loads Climb in Buyout Deals,” The Wall Street Journal, December 16, 2012.
Accessed February 15, 2013. Available at:
http://online.wsj.com/article/SB10001424127887324296604578179343631127394.html.
16
Mark Dezember, “Wave of Large Buyouts Unlikely to Follow Dell,” The Wall Street Journal, February
7, 2013. Accessed February 15, 2013. Available at:
http://online.wsj.com/article/SB10001424127887323951904578288291786509654.html?mod=googlen
ews_wsj.
17
Nancy Sanborn, Phillip Mills, and Saswat Bohidar, “Going Private Transactions: Overview,”
Practical Law Company, 2010. Accessed February 15, 2013. Available at:
http://www.davispolk.com/files/uploads/davis.polk.going.private.pdf.
18
Gretchen Morgenson, “Dell’s Intentions Get a Hard Look,” The New York Times, February 23, 2013.
Accessed February 27, 2013. Available at: http://www.nytimes.com/2013/02/24/business/dellshareholders-look-hard-at-takeover-effort.html?ref=gretchenmorgenson
19
Bary.
20
Tracy Alloway and David Gelles, “Dell puts special committees in focus,” The Financial Times,
February 10, 2013. Accessed February 15, 2013. Available at: http://www.ft.com/intl/cms/s/0/8036fe407330-11e2-ba90-00144feabdc0.html#axzz2KbFWXpVt.
21
Kirk Ladendorf, “Analysts: Unhappy investor unlikely to be able to stop Dell buyout,” The AustinAmerican Statesman, February 11, 2013. Accessed February 15, 2013. Available at:
http://www.statesman.com/news/business/analysts-unhappy-investor-unlikely-to-be-able-tos/nWL4p/.
Third Way Memo
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