Last Tuesday, Dell Inc. announced that it will go private, with Michael Dell, Silver Lake Partners, and Microsoft combining in a $24.4 billion offer that represents a 25% premium over Dell’s value prior to word of the discussions emerged. While there are some strings attached to the deal, it now seems inevitable that Dell will soon be a private company.
Out of the public spotlight, will things be different?
Will the absence of quarterly earnings pressure energize a set of business initiatives that will remake the storied PC maker?
Companies that go private no longer face quarterly earnings imperatives, instead have the opportunity to exercise more flexibility to take decisive actions that might affect near term reported earnings, but have attractive medium and long term returns. For example, some companies that have gone private after long tenures as public entities make bold moves such as:
- Accelerating and broadening offshoring initiatives, which had material upfront costs, but promise very attractive longer term economics. This longer term view unshackles key improvements, lubricated by fewer concerns in this case of exposure to public relations rhetoric that might move the market.
- Launching heretofore delayed M&A activity that had short term adverse earnings implications. This includes moving forward to jettison laggard units that would have triggered write-downs of under-performing assets.
What happens when cash really becomes KING?
Private companies, particularly those owned by performance-driven private equity firms, often shift toward maximizing cash generation rather than managing quarterly and annual earnings performance. This shift in the premier objectives can reshape many elements of the business; for example:
- Arrangements with customers may shift as T&Cs are realigned to prioritize cash over earnings
- Inorganic growth is viewed through a different lens as the firm no longer can use equity as a currency for acquisitions
- Strategic moves to fill capability gaps or establish footholds in new market segments are reoriented as private firms think (more than) twice about paying cash to acquire firms with high multiples and are more ready to consider divesting units that might command a high multiple
How does a big debt load change the game?
Most large buyouts of this nature end up with a debt-heavy capital structure, pushing for cash generation to retire debt and elevate value for equity holders – all within a time horizon for the investors that will generate very attractive returns. While GAAP earnings pressure might decrease, EBITDA pressure will elevate. Thus, priorities shift to emphasize:
- Driving cash flow up as quickly as possible to provide plenty of interest coverage and to start paying down principal
- Taking aggressive actions to drive the enterprise value north – the objective, after all is to make the investors rich(er) – growing enterprise value and position the firm to go public again in a few years at a much higher valuation.
Will being private drive a different organization culture?
Private companies really do act different. The opportunity – perhaps necessity – emerges to structure different incentives as the equity part of senior leaders (and deeper in the organization) shifts from a nearly day-to-day focus to the quest for a future liquidity event. This fundamental change in focus presents some heady organization design choices; for example:
- The balance of compensation schemes need to change. Structuring these most basic of incentives sends powerful signals on the direction and goals of the company
- This private company environment inevitably attracts a different talent profile that seeks a different kind of reward (more risk-taking?) and creates a distinctive opportunity for culture change
How will “new” owners shape the future?
When companies go private, a different ownership structure – often smaller and simpler – with a clear vision of success typically takes control. In most cases this new ownership profile has fewer shareholders with much greater influence on the firm’s direction. The newly private company experiences:
- Clarity of priorities which will define core business direction. For Dell, will this sharp focus lead to revitalization and sharper focus of the hardware business or a next generation firm driving innovation beyond traditional models?
- Opportunities for new partnerships (what will Microsoft do?) that could modify the shape of products, services and the basis of competition going forward
Private is different than public. Dell the private company will be different than Dell the public company. Customers and competitors will see changes – perhaps at a pace that rivals the Dell of the 1980s when it was last a private entity. Buckle up!
Image credit: Dell