Dell going private will benefit the PC industry
The big news on Wall Street this week is Dell Inc.’s move to go private with a $24.4 billion leveraged buyout, taking the company off the public stock exchange and safely out of reach from speculators, stock market analysts and hedge funds. Stockholders are being offered a premium of $13.65 a share, higher than share price was before the news broke, but significantly less than it was six years ago when it was trading at $24.
Analysts have different takes on the underlying reason, but what it all comes down to is this: The PC marketplace is highly commoditized and very low-margin, and it’s harder than ever to make a buck manufacturing computers. Combine that reality with the short vision of Wall Street, which takes away any ability to think long-term, and you have a recipe for a very big company falling hard.
Stockholders who have listened in on quarterly earnings reports will understand. These conferences typically are attended by several Wall Street analysts, who pretend to ask very detailed questions to make themselves look good. Behind every question and comment though, is one main focus: “How much money will you make next quarter?” Publicly held companies that are followed by analysts are expected to give “guidance”, which is Wall Street talk for providing a short-term, crystal ball prediction. Investments are made based on these educated guesses. In fact, it’s a wise practice for any business, public or private, to look out into the future and get a good idea of what’s going to be coming into the cash register over the next few months.
What is very limiting though in this scenario, is the fact that when a company makes a prediction for the following quarter and fiscal year, analysts hold them very strictly to it. If, for example, you predict a profit per share of five cents for next quarter, and you deliver only a profit per share of four cents, your stock will go down, even though you still had a profitable quarter.
The result of this short-term focus is that publicly held companies have to focus on meeting their “guidance” above all else, and this results in a strategy that de-emphasizes innovation and long-term growth. Dell’s going private will allow the company to take the bold, and potentially profitable strategies that Wall Street would not otherwise allow.
There are some big names behind the buyout, including private equity firm Silver Lake Partners, and Microsoft Corp., which is providing a $2 billion loan to the group taking Dell private. Microsoft moved into the PC business as well with the recent release of the slick Surface hybrid tablet/laptop device—a move that will change Microsoft’s relationship with PC vendors significantly. In a statement this week, Microsoft said that they “continue to look for opportunities to support partners who are committed to innovating and driving business for their devices and services built on the Microsoft platform.” It’s a good move for Microsoft, which, Surface product line notwithstanding, is still highly dependent on PC makers. It’s a small price to pay for cash-rich Microsoft. In addition to ensuring the longevity of a major partner that loads Microsoft software on large amounts of PCs, Microsoft will also get some long-term benefit simply because it will be supporting, indirectly, a move that will certainly result in more innovation in the PC marketplace.