The Larger Import of Dell Going Private

Dell made news last week by announcing the company would be going private through a $24.4 billion dollar buyout of its public shares. It's the biggest buyout since 2007 and for me it reminded me of a piece that appeared in The Economist ahead of the Facebook IPO that considered the retreat of public companies. The Economist remembers with fondness the innovation and participation the advent of public companies caused. I find the nostalgia a bit overbearing, but interesting. And the piece as a whole got me thinking.

The main purpose of any initial public offering (IPO) is to raise capital. An entrepreneur starts a company and grows the company with investors who receive private shares of the company. The logic used to go that a company would grow to a point where it would have exhausted its ability to raise additional large chunks of capital without turning to the broader public. Facing the need for greater capital, the company would "go public" allowing anyone to buy shares. Beyond raising capital, this was often a moment where those initial investors would have the opportunity to be handsomely rewarded for their initial investment, as those private shares they have are now traded publicly, often for much more then they invested to receive them.

Of course, there are down sides to going public. Public companies have extensive reporting requirements and disclosure requirements to the government and to the public. When a company goes public and has the opportunity to enjoy the capital of the greater public, it also has the harsh daylight of public access as well. Additionally, the company is largely beholden to its shareholders. What used to be a handpicked lot of investors becomes a seething rabble of apoplectic financials instruments and traders with varying levels of commitment and a rabid appetite for every quarterly update.

It used to be a company would face the reality of the capital and the rabble and the daylight. Now more so than a few decades ago they face a choice. The uber-wealthy have created or bought in to investment groups, so-called private equity firms. Where companies used to look to an IPO to raise the money required to make the leap to the next level but also looking to the public and the rabble, now there are pools of money looking for something with a potential above market return. Companies can raise the capital without dealing with the rabble and the daylight.

I think in time this new arrangement tells us a few things we need to be wary of as business and business forms move forward.

First, the growing predominance of these private equity firms is another sign of the bulging inequality in the United States. There is a section of the populace with access to vast fortunes of money, which I don't begrudge them, but they are using this sea of money to create investment groups that lock out the standard investor in many instances. There are some institutional investors in private equity firms and even some public private equity firms (if that makes sense), but most are not readily accessible to Joe Schmo. The heavy lift of capitalism is happening far above the level of the individual stockholder, creating a parallel exclusionary system which will only entrench the financial divisions in this country as those that would aspire to join the group are increasingly without the buy-in capital necessary because they can't find the investment opportunities that allow them to compete against the entrenched and monied interests.

Second, we need a collective "come to Jesus" moment for shareholders of public companies. You invest money, you want to see a return, but tremendous sums shoot around the system based on who made a nickel per share in the third quarter earnings report. That's not investing, it's hot potato. And it's unhealthy for the sustained success of public companies. I can appreciate, in part, Michael Dell's desire to take the company private. Dell is at a crossroads. They need to evolve to remain a viable company in five years time, but this isn't a company that's on the verge of collapse. Yet shareholders demand immediate return and as the evolution were to take shape, shareholders could have abandoned the company hastening the demise of a company that wasn't dead yet. So we need to encourage a change in shareholder behavior that looks beyond the next quarter to the next year or the next decade. Now that doesn't mean Dell is a great investment, but perhaps it would temper the velocity of retreat.**

Third, and this point could surprise some people, let's take a look at the regulation and reporting regime around public companies. If you're going to ask the public to invest in something they need to know what they're investing in, but there is the counterpoint to that where the reporting burden outweighs the benefit of raising capital in the public space. I'm concerned we've designed a regime to try and prevent the bad apples (looking at you Enron) and not a regime that facilitates the good apples. The Economist says, "[politicians] have heaped regulations onto Western public companies, blithely assuming that businessfolk have no choice but to go public in the long run." I think there's something to that statement. The reality is that companies have far more options then they did when the regime was original designed and added upon and policymakers should consider the regime, how to maintain the sterilizing effect of daylight, while also making the prospect of going public more attractive to companies.

So why does this all matter? Why does it matter where a company gets its capital? I think it matters because our economy works best when we all have a vested interest in it, and that interest needs to go beyond having a job or being able to buy a cheaper TV. Our economy and capitalism works best when everyone has a share in the continued prosperity of business enterprise. The expansion of private equity firms, I believe, is likely to lead to an even greater reality of haves and have-nots, because it makes the world of investments out of reach for your standard office worker. Much was made in the presidential campaign of Warren Buffet and Warren Buffet's secretary. I think the economy works best when Mr. Buffet and his secretary both have the regular opportunity to invest in a company, even if the volume of that investment is different. Again, not equality, equal opportunity.

Postscript on point number two: I don't have the data to know this, but I would be curious how much of the quarterly report tweakers, or at least the money they represent, are folks who also have shares in private equity firms. In other words, in their never ceasing profit seeking behavior are they diminishing the luster of being a public company because they want an immediate return? Seems the traditional investment interests like mutual funds and 401(k)s change investments, but exist for those longer timelines.