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Dell Go Private? History, Research Say It Could Be Good For Everyone Involved
Joseph F. Kovar
Should Dell become a private company, it will find much comfort in its decision from both the experience of other large companies that have done so as well as research supporting the benefits of going private.
Those benefits include the ability to restructure a company, push aside under-performing businesses and make long-term investments in R&D and innovation, all of which are hard or even impossible to do while under investors' microscopes.
For Dell, such a move would be driven by the need to reconcile its plans to be more of an enterprise-focused IT solution provider with the fact that the majority of its revenue still comes from its low-margin PC business.
[Related: Microsoft-Dell: What Is A Leveraged Buyout? ]
The possibility of Dell going private via investments from equity firms and possibly CEO Michael Dell was raised earlier this month.
Such a deal would be valued in excess of $20 billion, making it one of the largest privatizations on record.
Dell partner Microsoft is widely believed to be interested in investing $3 billion as part of the privatization move.
Should Dell go private, it would be in good company.
Storage vendor Seagate in early 2000 went private as part of a complicated $20 billion transaction involving Seagate, Veritas Software and an investment group. Under that deal, Veritas acquired all of the Veritas shares that at the time were held by Seagate, as well as Seagate's securities in several small hardware and software vendors.
Seagate's core operating businesses, including hard disk and tape drive manufacturing and $800 million in cash retained, were then acquired for $2 billion in cash by an investor group, which included the storage vendor's management team. Seagate's shareholders received common shares of Veritas plus cash.
Seagate at the time was concerned about the tax liability connected with the $128 million shares of Veritas it owned, whereas Veritas was concerned about a possible hostile takeover of that company. Veritas was acquired by Symantec in a $13.5 billion deal in early 2005.
Seagate eventually went public again in December 2002 to get the capital needed to invest in the fast-growing hard drive market. By that time, it had consolidated its manufacturing facilities and went through a major reduction of its workforce.
NEXT: The Benefits Of Going Private
In late 2010, Seagate toyed with the possibility of going private a second time after saying it was in discussions with an unnamed party widely believed to be TPG Capital and Silver Lake, the companies who took it private the first time. However, by year end, Seagate said such discussions had ended.
Seagate declined to comment about its experience to CRN.
Another example of a publicly listed IT company going private and then public again is security vendor WatchGuard Technologies, which was acquired by equity firms in 2006.
WatchGuard CEO Joe Wang recently told CRN his company had been struggling as a public company with stagnant technology and sales, but as a private company it could afford to invest in R&D for long-term gains without the need to satisfy the short-term needs of investors.
Those kind of results are supported by independent research.
A 2012 University of California Berkeley study, "Incentives to Innovate and the Decision to Go Public or Private," found that, while public companies are able to exploit existing ideas, private companies are better able to explore new ideas because their options are less transparent to investors.
The study's authors found that, in public companies, there is no tolerance for failure because good news provides incentives for short-term behavior. "Thus, the insider may prefer the conventional project because it has a higher probability of early success," the authors wrote.
Private firms, on the other hand, are more biased than public firms towards innovative projects.
"Our model predicts that firms should start under private ownership to provide incentives for exploration and experimentation. Our model also predicts that firms should go private when they need to undertake risky restructurings. Whenever a firm needs to reinvent itself, it makes sense to do so out of the public eye. Major restructurings involving radical changes in strategy are more properly motivated under private ownership," the authors wrote.
One of the examples cited in the Berkeley study was Seagate, which the authors said lagged behind its competitors in terms of the number of patents it had before it went private. "Seagate's innovative position improved significantly after the buyout," the authors wrote.
NEXT: The Need For A Transformation Of Dell
Martin Wolf, founder and president of Martin Wolf, a technology services M&A financial services advisor based in San Ramon, Calif., said public companies go private for a variety of reasons, including strategic and financial reasons.
In Dell's case, the company, in its promotions and advertisements, focuses on solutions, but it still remains a large PC shop, Wolf said. Dell will not likely rid itself of the PC business, but it cannot grow via a focus on that low-profit part of its overall business.
"The Dell company has to be transformed," he said. "But it can't as a public company."
Paul Clifford, president of Davenport Group, a St. Paul-based solution provider that counts Dell as its largest vendor partner, said his company has thought a lot about what a privatization would mean.
Logically, the idea that private companies are more innovative than public companies, as posited by the Berkeley research, makes sense to Clifford.
"It seems Dell would be able to accelerate its move to be more of an enterprise company without the eyes of Wall Street on them," he said. "It would let them take more risks and be more innovative. I hope it happens. Dell is bringing us great products and support. If they go private, I think we'll see more good stuff."
When customers ask how the privatization of Dell might impact them, Clifford jokes that Michael Dell has yet to call him to give him details.
"I tell them a $20 billion buyout would probably be in everybody's best interest," he said. "No one would invest $20 billion in a company without seeing it through to success. But if the investment doesn't happen, I'm OK. Everything for now from Dell is still moving in the right direction."
PUBLISHED JAN. 25, 2013