Public, private, now public again. Dell’s dance with investors makes sense
After Michael Dell wrested his technology company from shareholders in 2013, he insisted that going private would provide a big strategic advantage, freeing him to address long-term challenges without “the problem of short-term thinking in financial markets.”
But that was then. Monday morning, Dell revealed plans to go public once again, courting investors and braving the short-termism of fickle market players to ensure a stable supply of capital for the company’s future.
What changed over the past five years?
For one thing, Dell really does seem to have reinvented itself, using a combination of big debt and the outsize takeover of EMC Corp. of Hopkinton to expand beyond the arena of personal computers and become a driving force in the worlds of storage, virtualization, and the Internet-of-Things.
But the company’s decision to put its stock in the hands of public investors also reflects some pretty dramatic changes in the world of finance that have made it more appealing — sometimes downright urgent — for private businesses like Dell to rethink the virtues of being a public company.
Start with this: Dell may be ready to share profits with investors, but it’s not going to let those investors shape company decisions. The new Dell stock will have limited voting rights, so that Michael Dell and his private equity partner can retain majority control no matter how many other shareholder-owners there might be.
Gone, in other words, is the traditional arrangement where shareholders who put their money on the line get a proportional say in how companies operate. And note that Dell is hardly alone in pushing this thanks-for-the-money-see-you-later approach. Facebook insiders, like founder Mark Zuckerberg, hold shares with 10 times the voting power of regular investors. Google offers some shares with no voting rights at all.
For control-hungry founders, it’s the best of both worlds. By creating different types of shares, with unequal voting rights, they can raise money without ceding control.
And that’s just the first reason private companies like Dell are newly willing to consider going public. There’s also the fact that they carry a lot of debt.
So far, it has been able to manage that debt without incident, but of course the economy has been strong and interest rates low. Going public should give the company the option to raise equity to fund growth or navigate rockier times.
Here, too, Dell may be emblematic. With fewer disclosure requirements than public companies, it’s hard to know exactly how much debt private companies are carrying. But private equity deals are bumping up against debt limits while total corporate debt has crossed the $6 trillion dollar threshold, even higher than the levels reached before the 2001 and 2007 recessions. And while low interest rates have made such debt loads seem relatively light, that could change quickly if earnings disappoint and the Fed continues to hike rates.
Plus, business debts have already gotten a bit more expensive, thanks to a provision in the Republican tax cuts that limits the tax deduction companies get for their interest payments.
Given such risks, and the already substantial debt load companies like Dell are carrying, it makes sense for them to think about finding new investors, rather than new lenders, if they need to raise more money in future.
Which leaves one last reason private companies might consider a dalliance with public markets after decades where everyone seemed to be moving in the other direction. It’s about another part of those tax cuts, which slashed the tax rate for public corporations from 35 percent to 21 percent. That's a big incentive.
This doesn't seem to be an issue in Dell’s case, since the company was already subject to the corporate tax and had actually fought against parts of the tax bill (particularly those new rules around debt.)
But many private companies — including some big ones — have chosen to structure themselves in a way that avoids corporate taxes. Instead, their owners treat profits like salary, and just pay individual income tax. Under the new tax law, the advantage isn’t so clear cut, which could inspire more private-to-public reorganizations.
Dell is unique in other ways, too. It already has a kind of quasi-public status, built around an unusual arrangement where it offers Dell-stamped shares that track the value of a key subsidiary. Converting those shares is actually a key part of its plan for a smooth transition back to fully public.
Also, Dell’s move could prove more dramatic than most because the company has a kind of nemesis, in the form of activist investor Carl Icahn. He fought for every penny in 2013, when Dell needed shareholder approval for its plans to go private. And guess who just happens to be one of the folks whose approval Dell may need again this time around?
Though even this may not be the end of Dell’s on-again, off-again relationship with shareholders. In 2013, Michael Dell bet that his company would be better off in private hands; now he’s asking for the second-by-second scrutiny that comes with being a public company. Maybe the safest bet is to set your calendar for another announcement around 2023.