By Mary Ellen Biery, Research Specialist, Sageworks
With the shareholder vote on Michael S. Dell's proposed takeover of Dell Inc. (NASDAQ: DELL) about a month away, it's not surprising that he and private equity firm Silver Lake are battling to fight off opponents of the deal, namely activist investor Carl Icahn.
Wall Street analysts and money managers and pundits may say it's all about which is the best deal, and perhaps it is. But undoubtedly, a major reason for the go-private effort is very understandable to others who have built companies from scratch, according to Brian Hamilton, chairman of Sageworks, a financial information company.
"When entrepreneurs start a company and as they grow it, many hope that they'll see a strong relationship between what the business is doing now, or what it's doing 10 years from now, and how the company is valued, the happiness of their customers, the happiness of their employees," Hamilton said.
But it seems that when you're running a publicly traded company, a short-term focus on what's happening today to the stock price and what's going to happen when you disclose your quarterly results can take hold, and it doesn't allow senior management as much freedom to plan for and take steps for the long run. The focus on what investors think and what they might do to the company's valuation can take the spotlight away from managing and planning the business strategy for the short run, the intermediate term, and the long run, according to Hamilton.
"Right now, Mr. Dell is faced with a conundrum," Hamilton said. "He must fundamentally change his business model, but he also has to face the stock market every quarter to provide earnings and estimates. He needs some breather time to reconstruct and rebuild his business, which is very difficult when you're publicly traded."
In fact, Michael Dell said as much in a recent SEC filing. In the filing, Dell acknowledges a radical transformation of the company is necessary to preserve operating income from the PC market and to invest in opportunities in software and services.
"These steps in Dell's transformation are needed to restore the Company to health in the long term. [underlining in the original] In the short term, however, they are likely to lower gross margins, raise the Company's operating expenses and raise capital expenditures, resulting in lower earnings," Dell says in the filing.
He goes on to note that a continuing drop in Dell's stock price could hurt customer perception and employee retention. Taking a more cautious approach because of the public share price, he said, "hurts the speed and efficacy of the transformation and is not good for the long-term health of the Company."
Hamilton noted that Dell is currently valued at roughly 40 cents for every sales dollar, based on trailing sales. That valuation is a little bit low, and that's certainly likely to be a source of stress for the founder, Hamilton said.
"Dell has positive cash flow and earnings and a healthy net profit margin," Hamilton said. "Sales dropped 8 percent in the most recent period, which is troubling. However, looking at their flat but consistently strong profit margins, Dell appears to have enough cash to rebuild, even though they may not have the same access to capital as they would as a publicly traded company."
The allure of escaping life on the stock exchange seems to be fairly common among founders of publicly traded companies that lose their way. Just since 2012, Best Buy Inc. (NYSE: BBY) and Barnes & Noble's (NYSE: BKS) founders have launched buyout efforts, although Best Buy's was scrapped.
And it's a reason, Hamilton noted, that a lot of companies stay private. "It's because they want to think of the short run, the intermediate run and the long run valuation and performance rather than literally just hourly performance," he said.