In today’s economic environment, remaining a public company has its advantages and disadvantages. An investor in a public company, if the company is in good financial condition, holds a liquid asset in the form of stock, which can bring in cash periodically by earning a decent dividend or be easily sold.
On the other hand, a public company must abide by regulatory requirements and provide periodic financial information to the regulators, such as to the U.S. Securities and Exchange Commission (SEC). For example, the Sarbanes-Oxley Act of 2002 (SOX) levies extensive compliance and administrative requirements on public companies.
A private company does not have to abide by the multitude of SOX regulations. It is not required to report to the SEC or beholden to stockholders. The company can operate without being constantly evaluated by investment companies and others. Furthermore, financial transparency isn’t on the top of the list, unless the corporation wants to borrow from the lending sector.
In a private company, “shares of the company are not for sale to the public, plus the company doesn’t have to file public financial statements,” according to an entry on the Dave Manuel.com website.
Dell Going Private
“Dell Inc. announced it has signed a definitive merger agreement under which Michael Dell, Dell’s Founder, Chairman and Chief Executive Officer, in partnership with global technology investment firm Silver Lake, will acquire Dell,” Dell Inc. announced in a statement on Feb. 5.
The stockholders will be paid in cash at $13.65 per share for all their Dell common stock to a total of $24.4 billion.
According to the announcement, the amount per share the stockholders will receive is based on different types of calculations, including a premium of 25 percent over Dell’s Jan. 11 closing price, a premium of 35 percent of Dell’s enterprise value on Jan. 11, and a 37 percent premium over the average closing share price during the 90 days leading up to Jan. 11.
The enterprise value is the market value of a firm, which is based on the market capitalization plus the company’s debt, minority interest, and preferred equity, less cash or cash equivalents of the company.
After Jan. 11, Dell’s stock prices trended upward. According to historical stock prices published on the NASDAQ website, the stock price moved from $10.88 on Jan. 11 to $12.29 on Jan. 14, a 12.96 percent increase. On Feb. 8, the stock price reached $13.63, a 25.28 percent increase.
Dell is leaving itself open for competing bids for 45 days, called the “go-shop” period. To be considered a qualified bidder for the company, a competing bidder must agree to a $180 million termination fee, while an unqualified bidder would have to pay $450 million for dropping out of the bidding process. Generally, such fees are between 1 and 3 percent.
“The proposed $24.4-billion deal to take the company private will be the first step in the transformation of the company into a ‘mini IBM,’ according to Wall Street pundits,” a Feb. 8 article on the Profit Confidential website states.
Dell’s Strategic Shift
Based on information from a source in the know, a Feb. 8 analysis on the Lazure technical website states, “Dell is going private because the company is in the middle of a 5-year transformation from ‘PC manufacturer’ to ‘single-source provider of corporate cloud and security solutions’ (sort of a mini-HP or mini-IBM model) and the market is giving it no credit for that transformation.”
The media, investors, and market analysts suggest that it is imperative for Dell to distance itself from its deteriorating personal computer (PC) business. The company tried to shift to different types of mobile devices and laptops, but couldn’t compete with Apple Inc. and Samsung Electronics Co.
Dell could be compared to the Hewlett-Packard Co. (HP), which is also trying to reinvent itself. Both companies have passed the maturity stage and are in the declining stage of a business cycle.
HP has yet to find the niche where it can succeed in its highly competitive environment. Dell might divest its PC business and focus on just becoming a service provider for larger firms.
“The problem with old technology companies such as Dell and Hewlett-Packard is that they didn’t keep up with the times. … The technological shift is occurring again, and old tech companies selling tired products are dying a slow death, unless they make drastic changes,” the Profit Confidential article advises.
Dell Facing Stockholder Opposition
Southeastern Asset Management Inc., which manages Dell’s largest stockholder Longleaf Partners Funds, states in a Feb. 8 letter to Dell’s board of directors that the buyout as presented “grossly undervalues the Company.”
Southeastern, which owns 8.5 percent of Dell’s outstanding shares on behalf of its clients, expresses discontent in its letter, stating that the acquisition offer undervalues the worth of the firm significantly.
The going private transaction “clearly represents an opportunistically timed bid to take the Company private at a valuation far below Dell’s intrinsic value, and deprives public shareholders of the ability to participate in the Company’s substantial future value creation,” Southeastern states in its letter.
Southeastern details the reasons the stock valuation is far below the company’s value by evaluating Dell’s business segments and concludes that the present share price should be closer to $24.00 and not $13.65.
“If the buyout goes ahead, Southeastern may lose out the most. Having purchased its stake for over $20 a share, the firm may lose close to $825 million based on the $13.65 offer price,” according to a Feb. 8 article on the ZDNet website.
Stockholder Class Action Complaint
On Feb. 6, Dell investor Catherine Christner filed a class action complaint against Dell at the Court of Chancery of the State of Delaware, accusing Dell directors and one executive of violating their fiduciary duties.
According to media reports, a number of Dell investors have joined the ranks of those who are irritated by the terms of sale, including Alpine Capital Research and Schneider Capital Management.
“This shareholder class action arises from defendant Michael Dell (‘M. Dell’) abusing
his status as CEO, chairman of the Dell Board, and approximately 15.7% owner of the Company’s common stock, to participate in an opportunistic management-led leverage buyout of Dell,” according to the court document published on the Bloomberg website.
The lawsuit charges that by going private, the defendants want to bring the company under their control on the cheap.
The filing details the recent process of diversifying and reinventing the company, bringing out that the offer undervalues the company significantly and is a sweetheart deal for Silver Lake and Michael Dell, who will remain as chairman and CEO. Furthermore, the filing states that all those involved in the going private transaction are violating their fiduciary responsibility to the shareholders.
“Defendants have breached their fiduciary duties of loyalty, due care, independence, good faith and fair dealing, and/or have aided and abetted such breaches by the Board,” the class action complaint charges.
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