It may be the end of all for Dell (NASDAQ: DELL) shareholders as Mr. Dell is taking his company private, which means selling out public shareholders to private equity firms. Remember, Mr. Dell is also an investor with Silver Lake Management, the lead private equity manager for the proposed Dell buyout. It didn’t matter that Dell, the company, is almost 85 percent owned by public shareholders, as the deal talk proceeded apparently without much of their representation. Relinquishing public shares now to private equity at a potentially depressed valuation doesn’t seem to be in the best interest of the public shareholders. Meanwhile, leaving the public market won’t really affect Mr. Dell as he can still retain a stake of the new company in private.
Navigating through public investing is no easy task nowadays if it was ever easier when there were fewer IPOs and private-equity deals that have now become almost daily headlines. An investor today not only must understand a company’s business fundamentals, assess its management’s capability and stay on top of market sentiment, but also have to watch for potential deal proposals and be aware of their implications.
Is an IPO being used as a genuine public financing initiative or an early investment exit tactic? Can a private equity buyout properly value public shareholding or will it replace it in ways favorable to new private equity owners? Not mindful of today’s complex investment schemes, public investors can quickly lose from overvalued IPOs on one end of the investment spectrum and undervalued private equity deals on the opposite side.
While investors can choose not to participate in IPOs that they perceive as overvalued, they don’t really have a say about their shareholding stakes when their company is taken private. It was quite shocking that Dell would go private at the expense of its public shareholders. Because of the potentially less optimal valuation, shareholders would most likely lose. Moreover, shareholders would also be shut out on chance to benefit from the company's any future turnaround.
After billions of dollars of shareholders’ cash have been spent on purchasing enterprise-computing companies to help Dell transition itself in a post-PC era, don’t shareholders have the right to see it through if they so wish? Some kind of a “tender offer” should have been made available to shareholders so that those who can risk the illiquidity of non-public capital could have the choice to stay in private with the company.
It wouldn’t be any more shocking to attempt the idea that other companies in similar situations might also subject themselves to going-private speculations. For example, Hewlett-Packard (NYSE: HPQ) and Intel (NASDAQ: INTC) are really resembling cases as both companies are also struggling with their PC-related business, while still holding tens of billions of cash that private equity firms would love to tap into when buying out public shareholders. Moreover, both H-P and Intel stocks are trading at respective price-to-equity ratios lower than Dell’s, creating attractive valuation opportunities for private equity deals.
Concerns of even such remote possibilities could cause enough uncertainties for both shareholders and potential investors. As much as it makes little sense for high-profile companies with brand-name products to stay out of the public eye and thus lose consumer attention, investors can never over-prepare themselves for even the rarest occurrence that may affect their investments. Overvalued investments in non-performing companies are likely to lose value in the event of corporate restructuring.
To further complicate the matter, some companies can even go in and out of the public market in a flash, adding more uncertainties for public investors. After a brief run as a public company, Ancestry.com, the Internet company operating a popular family-history search Website, was recently taken off its Nasdaq listing by private equity firm Permira Advisors. The company’s lackluster stock performance was reportedly a main reason for the buyout. It was believed that the private market might understand and thus value its obscure business better.
In Dell’s case, it’s also true that investors have not pumped up its stock price despite repeated efforts to improve business performance by the company. Frustration likely was built up high at top management, but it’s difficult to argue that the public market doesn’t understand a mainstream technology company like Dell and thus is not valuing it properly.
While a privately-owned Dell may or may not succeed as an enterprise in the future, sophisticated financial maneuvers will most likely generate profits for new equity owners and the rest of the buyout team including banks providing financing for the share purchases. Unfortunately, public shareholders become part of the playing chips in private equity’s valuation games, and maybe the most heavy ones when a privately-held company is repackaged in an IPO and sold back to the public market.
Navigating through public investing is no easy task nowadays if it was ever easier when there were fewer IPOs and private-equity deals that have now become almost daily headlines. An investor today not only must understand a company’s business fundamentals, assess its management’s capability and stay on top of market sentiment, but also have to watch for potential deal proposals and be aware of their implications.
Is an IPO being used as a genuine public financing initiative or an early investment exit tactic? Can a private equity buyout properly value public shareholding or will it replace it in ways favorable to new private equity owners? Not mindful of today’s complex investment schemes, public investors can quickly lose from overvalued IPOs on one end of the investment spectrum and undervalued private equity deals on the opposite side.
While investors can choose not to participate in IPOs that they perceive as overvalued, they don’t really have a say about their shareholding stakes when their company is taken private. It was quite shocking that Dell would go private at the expense of its public shareholders. Because of the potentially less optimal valuation, shareholders would most likely lose. Moreover, shareholders would also be shut out on chance to benefit from the company's any future turnaround.
After billions of dollars of shareholders’ cash have been spent on purchasing enterprise-computing companies to help Dell transition itself in a post-PC era, don’t shareholders have the right to see it through if they so wish? Some kind of a “tender offer” should have been made available to shareholders so that those who can risk the illiquidity of non-public capital could have the choice to stay in private with the company.
It wouldn’t be any more shocking to attempt the idea that other companies in similar situations might also subject themselves to going-private speculations. For example, Hewlett-Packard (NYSE: HPQ) and Intel (NASDAQ: INTC) are really resembling cases as both companies are also struggling with their PC-related business, while still holding tens of billions of cash that private equity firms would love to tap into when buying out public shareholders. Moreover, both H-P and Intel stocks are trading at respective price-to-equity ratios lower than Dell’s, creating attractive valuation opportunities for private equity deals.
Concerns of even such remote possibilities could cause enough uncertainties for both shareholders and potential investors. As much as it makes little sense for high-profile companies with brand-name products to stay out of the public eye and thus lose consumer attention, investors can never over-prepare themselves for even the rarest occurrence that may affect their investments. Overvalued investments in non-performing companies are likely to lose value in the event of corporate restructuring.
To further complicate the matter, some companies can even go in and out of the public market in a flash, adding more uncertainties for public investors. After a brief run as a public company, Ancestry.com, the Internet company operating a popular family-history search Website, was recently taken off its Nasdaq listing by private equity firm Permira Advisors. The company’s lackluster stock performance was reportedly a main reason for the buyout. It was believed that the private market might understand and thus value its obscure business better.
In Dell’s case, it’s also true that investors have not pumped up its stock price despite repeated efforts to improve business performance by the company. Frustration likely was built up high at top management, but it’s difficult to argue that the public market doesn’t understand a mainstream technology company like Dell and thus is not valuing it properly.
While a privately-owned Dell may or may not succeed as an enterprise in the future, sophisticated financial maneuvers will most likely generate profits for new equity owners and the rest of the buyout team including banks providing financing for the share purchases. Unfortunately, public shareholders become part of the playing chips in private equity’s valuation games, and maybe the most heavy ones when a privately-held company is repackaged in an IPO and sold back to the public market.
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