Why do some public corporations choose to be private and de-list their shares from stock exchanges? On Oct. 29, 2013, Dell announced that Michael Dell, founder and CEO, and Silver Lake Partners, a leading global technology firm completed acquisition of Dell’s outstanding shares. Michael Dell said he can focus on building the company, “Not the 90-day shot clock” of continually worrying about earnings. Besides, going private will give his company the ” time, investment, and patience ” to make progress. Indeed, they made progress. And five years later, Michael Dell plans to take Dell public again, to boot!
Public Corporations Becoming Private for Long-Term Focus
Many public corporations choose to be on an earnings treadmill to satisfy Wall Street’s appetite. They believe they must provide quarterly earnings estimate publicly (guidance) or their shares won’t trade at their optimal values. So they focus on next quarter’s earnings, and they better be accurate. Otherwise, traders on the Stock Market might clobber their shares.
Take Walmart. On Wednesday, October 14, 2015, its CEO announced earnings would be down in the next fiscal year because of targeted spending to position the company for growth. Shares fell 10%-the steepest one day decline in 25 years. Chief Executive Doug McMillon said at an investor meeting in New York, “We can deliver stronger financial performance in the short-term simply by running our core business better, but that won’t be enough.”
Almost three years later, shares rebounded; today, the shares are significantly higher, proving the CEO right. A McKinsey Company 2006 study shows quarterly earnings guidance does not provide benefits claimed by corporations and is not worth the costs of providing them:
“Our analysis of the perceived benefits of issuing frequent earnings guidance found no evidence that it affects valuation multiples, improves shareholder returns, or reduces share price volatility. The only significant effect we observed is an increase in trading volumes… ”
Other reasons for a company going private include less scrutiny of results by the public, more flexibility, sharper and more consistent focus on the long-term by management.
Dell Planning To Become Public Corporation… Again!
Ironically, after five years, Michael Dell is planning to take the company public again. Why would he do this? What has changed? As a private company, in September 2016 Dell acquired fellow tech giant EMC for $67 billion. Unlike Dell that’s mainly in hardware, EMC was mostly in software. Following the acquisition, Dell changed its name from Dell Computer to Dell Technologies to signal the shift away from hardware. If Dell were a public company, analysts would scrutinize it in-depth, some would criticize, and generally distract Dell’s management.
No doubt, Michael Dell, and his partners are ready to cash in on Dell’s increased valuation from building the company during those five years. It will be interesting to see whether Dell chooses to get back on the quarterly earnings’ treadmill, or stay off like Warren Buffet, and other executives.
Taking a public corporation private can be expensive. However, being private can give owners time to restructure without distractions from outsiders. Detailed scrutiny by myopic analysts could result in unhelpful comments that might require thoughtful but unnecessary responses. Unfortunately, Wall Street’s focus is solely on making money today, not on the long-term viability of the public corporation.