THE WALL STREET JOURNAL.
ACCOUNT | July 15, 2013, 6:26 p.m. ET
Dell Deal an Example of the
Upper Hand Held by Smart Financiers and Knowledgeable Insiders
Would Dell be better off
away from the tyranny of quarterly earnings and
what-have-you-done-for-me-lately shareholders? Francesco Guerrera
joins the News Hub with his take.
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
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.
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."
Tech-firm founder Michael Dell
Executives don't think public
markets are preferable to being behind the private-equity veil. Shown,
Robert Nardelli, who has been on both sides.
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 firm.
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 sign 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
—Francesco Guerrera is The
Wall Street Journal's financial editor. Write to him at:
follow him on Twitter:
Francesco Guerrera at
A version of this article
appeared July 16, 2013, on page C1 in the U.S. edition of The Wall Street
Journal, with the headline: Wondering Who Wins In Buyouts.
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