Why Go Private?

Being the promoter of a public company is seen as prestigious.So why do promoters sometimes opt to make their company private again?The simple answer is often the possibility of Private Gains.Public share holders and promoters often have vastly different perspectives on making money,vastly different time horizons when it comes to harvesting gains,vastly different risk perceptions and holding power.Here is an example:

In early ’13,Dell had  a total market cap of about $22 billion.  They also had about $11 billion in cash, which meant the stock market was valuing the entire business at $11 billion ($22 – 11).  The company had a price-to-earnings multiple of about 8.5.

So the situation was that, if Michael Dell and private equity investors put in $2 bilion, used the cash on the company’s books and borrowed the remaining $9 billion, they could control the entire company without the hassle of having public shareholders.

The flexibility of not having public shareholders would enable Michael to do what has needed to be done for years, and that is massively streamline the company’s manufacturing and sales forces (probably through layoffs), re-focus the core PC business, grow the enterprise and consulting businesses, and make the company generally more Lenovo-like or IBM-like.

Now, let’s just say for illustration purposes that Michael was able to accomplish this all in  a few years.Now a leaner, more competitive Dell would emerge.  They also might be betting that a combination of PC refresh cycles and the general economic cycle are ahead of us.  Well, say that the public markets would now be willing to assign a price to earnings multiple that is now similar to Lenovo’s (which is today about 20).  If no other factors changed, Dell could conceivably be a $50 billion company.  Dell was a $100B company at its zenith.  Then, they decide to go public (or merge with Lenovo, HP, ASUS, etc.) again at this multiple and cash out.In this scenario, for a paltry $2 billion dollars, the investors could bank a profit of $28 billion dollars.  This type of score does not seem out-of-bounds.  Lenovo is at this P/E right now, and they don’t have nearly the same enterprise assets as Dell.

Now, let’s say that things aren’t as rosy and things more-or-less stay the same.  They could trim the company to the bone, and just ride out the PC business for as long as they can, and they would still probably be able to recoup their investment with cash flow in a matter of 5-6 years, and not have pain-in-the-neck public shareholders.It’s painfully remote that the company would be so mis-managed as to get choked by the debt they take on to buyout the company to the point where they lose it all, but  that’s a possibility too.

They could alternatively sell off divisions too.  For example, they would have been able to sell the PC business for, say $8 Billion (a figure well in line with what ASUS and Lenovo would pay).  The investors then use that $8 billion to re-pay the $9 billion loaned to buy the company, and poof, now they have a relatively debt-free company that still has their enterprise, servers, consulting, and software businesses (the most profitable part of the company now) for a paltry $2 billion.

Put, simply, the company’s promoters  got frustrated that, despite years of acquiring and diversifying away from the low-margin/commodity PC business, the company is still recognized as a PC company by the public markets.  They think they should be more richly valued.Time will tell who got things right,the public or the promoters.