By Francesco Guerrera
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– Bloomerg News |
Farewell, then
DELL. After a quarter century of service, the stock ticker for
Dell Inc. is likely to be consigned to the dust bin of history
this week. On Thursday, to be precise, shareholders are expected
to seal the sale of the computer company to the private-equity
firm Silver Lake Partners and founder
Michael Dell.
The soon-to-be owners argue—and shareholder advisory firms
agree—that this is for the best. That turning around a struggling
personal computer maker simply can’t be done in the public
markets. That the tyranny of quarterly earnings, fickle share
prices and what-have-you-done-for-me-lately investors is too hard
to endure.
Mr. Dell
summarized his reasoning last month. “As a public
company,” he wrote in an investor presentation, “we must take a
more cautious approach to our transformation, because we must
consider how our stock price will react to the steps we take and
what effect that will have on the company and on customers and
employees.”
It is a tried-and-trusted argument that corporate restructurings
can be carried out much more easily away from the prying eyes of
the market.
Is that true? Or are public shareholders selling too soon, leaving
money on the table for private-equity groups and corporate
management?
Edward Garden, chief investment officer of the activist investing
firm Trian Fund Management LP, thinks it is the latter.
Mr. Garden, who co-founded Trian with Nelson Peltz and Peter May,
told me that the idea that private equity knows best “has led to a
huge transfer of wealth from public shareholders to private
shareholders.” In his view, fund managers have finally realized
that and are pushing back. “There has been a sea change in the
mind of public shareholders,” he said.
Mr. Garden’s perception may be colored by the fact that activists
often compete with private-equity firms on deals. But his points
strike at the heart of the debate over the merits of being a
public company.
The argument in favor of buyouts of ailing companies is based on
the twin premise that stockholders can’t stomach the share-price
and earnings volatility caused by turnaround plans, and that
having a handful of highly focused owners is more conducive to
radical change than a diffuse band of holders.
The first assumption runs counter to the mantra chanted by pension
funds, mutual funds and even some hedge funds: “We are long-term
investors.”
If that is the case, then shareholders ought to be more willing to
forgo short-term gains in order to reap the benefit of big
corporate changes.
Those fund managers who believed in the turnarounds of, say
Apple Inc. and
International Business Machines Corp. in the mid-1990s, are
probably reading this from a very large mansion.
Bill Riegel, who oversees $214 billion as the head of global
equity at TIAA-CREF, believes shareholders can, and should, look
at the long term. “I wholeheartedly disagree that restructurings
can only be done in private,” he said. “This is how I built my
career. I am a value guy and that’s what value guys live for,” he
said, referring to the investment strategy of seeking undervalued
companies.
It helps that, in Mr. Riegel’s case, he is assessed and
compensated over a five-year time frame and not quarterly, as are
colleagues at some rival firms.
But given the noise big funds make about their patience, the onus
should be on them to push for and support turnaround plans that
create long-term value for their companies, rather than taking the
private-equity money and running.
There is little evidence of a sea change. The first six months of
2013 were the best half-year for U.S. buyouts since 2007,
according to Dealogic.
There is even less debate on the management. I haven’t found a
single executive who thinks that being in the public markets is
preferable to being behind the private-equity veil.
Not even
Robert Nardelli, whose career spanned public markets (General
Electric Co. and
Home Depot Inc.) and private ones (Chrysler Group LLC and
other senior roles at Cerberus Capital Management LP). “We were
able to get quick yeses, quick nos and no slow maybes,” Mr.
Nardelli said of his time at the Cerberus-owned Chrysler.
(Chrysler ended up in Chapter 11 in 2009, but that is another
story).
Mr. Nardelli, who now runs his own investment firm XLR-8, recalled
that, shortly after Cerberus bought Chrysler in 2007, the car
maker raised about $1 billion by selling noncore assets. The
divestments bolstered its finances but hurt earnings in the
short-term, something the public markets would have hated.
Dell is following a similar playbook now. Its shareholders, and
those in future private-equity targets, should be concerned that
they are being picked off by smart financiers and knowledgeable
insiders. And then do something about it.
– Additional reporting by David Benoit
Francesco Guerrera is The Wall Street Journal’s financial editor.
Write to him at
currentaccount@wsj.com and follow him on Twitter:
@guerreraf72.
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