Why do public corporations become private and delist 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 earnings paranoia. Besides, going private will give his company the ” time, investment, and patience ” to make progress. And they made progress. But, five years later, Michael Dell plans to take Dell public again, to boot!
Public Corporations Becoming Private for Long-Term Focus
Many public firms choose to be on an earnings treadmill to satisfy Wall Street’s appetite. These firms believe they must provide quarterly earnings estimate publicly (guidance) or their shares won’t trade at optimal values. So executives focus on next quarter’s earnings, and they better be accurate. Otherwise, traders on the Stock Market might clobber those shares.
Take Walmart. On Wednesday, October 14, 2015, its CEO announced lower earnings 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. CEO McMillon told investors 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.”
Three years later, shares rebounded. Today, share values are much higher, proving the CEO right. A McKinsey Company 2006 study shows quarterly earnings guidance does not give benefits claimed by firms 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!
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 bought fellow tech giant EMC for $67 billion. Dell’s main business was hardware, and EMC’s software. Following the purchase, 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 distract Dell’s management.
Michael Dell, and his partners are ready to cash in on Dell’s increased value during those five years as a private company. Will Dell return to quarterly earnings’ treadmill? Or will they stay off like Warren Buffett, and other executives?
Taking a public firm private is expensive. But, being private gives owners time to restructure without distractions from outsiders. Detailed scrutiny by myopic analysts is a diversion. It’s unhelpful and futile. Wall Street analyst’s focus is making money today, not on the long-term. Pubic firms must look long-term and ignore Wall Street’s noise.
© 2018 Michel A. Bell