I am absolutely infatuated by the recent Wall Street Journal article by Michael Dell ( of Dell ) and how he feels his company is doing following their privatization.
The article is sunshine and roses from Michael Dell. Honestly, I didn’t know what I was reading at face value so I did some homework on why a company might want to be public or private, and what it could mean for the future.
Investopedia Says :
“A public company may choose to go private for a number of reasons. An acquisition can create significant financial gain for shareholders and CEOs, while the reduced regulatory and reporting requirements private companies face can free up time and money to focus on long-term goals. Because there are advantages and disadvantages to going private as well as short- and long-term issues to consider, companies must carefully weigh their options before making a decision”
In English? Less babysitting by investors.
Further, Investopedia states :
“Being private frees up management’s time and effort to concentrate on running and growing a business, as there are no SOX (Sarbanes Oxley) regulations to comply with. Thus, the senior leadership team can focus more on improving the business’s competitive positioning in the marketplace”
So what? Well, maybe its a bigger deal than we think. Its one thing for a tech company like Facebook and even Apple to continue to innovate while being a publicly traded company. In fact, investors are probably investing in these companies because they are expected to innovate and continue to achieve impressive growth.
However, when investors put money into your standard blue chip companies, Walmart, Nike, the cruise lines like I currently work for, they expect continued growth, but probably not too much in the way of innovation. They want an steady hand on the wheel. ( I am not saying these companies do not innovate, they most definitely do, they just have their shareholders to answer to)
In fact, Investors in blue chips don’t want innovation! They want to
a) protect their money, and they
b) want a modest performance boost
So the big dawgs at these companies spend ALL their time pandering to their investment. Which is ok, ethical, and lawful. These executives of these companies have a bound responsibility to the shareholders, it makes sense, and is fair in our culture.
But this strikes me as a major disappointment in the ability of companies to make meaningful change! The rallying cry of Generation Y and Personality Idealist like me. It is this rigidity that may be hurting the future of companies that produce things other than websites. It may cost them their dominance in the global marketplace!
As investopedia notes with regards to public companies operations :
“This short-term focus on the quarterly earnings report, which is dictated by external analysts, can reduce prioritization of longer-term functions and goals such as research and development, capital expenditures and the funding of pensions, to name but a few examples ”
I am not interested in the pensions as most major companies no longer have pensions. But what about :
1) investments in your people
2) investments in your products
3) capital expenditures in R&D
All long term strategic investments than can be nixed at a shareholder meeting.
But if you are an employee or fan of these big corporate giants you have a different take.
As an employee I want to see an improvement of our lifestyle. A fair growing wage that represents the growth of the company. Fair, not disproportionate, employees understand the shareholders are owed their due. In many cases employees would be happier with other perks and lifestyle improvements in addition to experiencing the creativity of their leaders. Employees would be overjoyed to know they aren’t going to get fired to maintain stock price. They would be in awe to experience innovative market growth under an inspirational leader driving progress.
If I am a fan of a company or industry leader, I want to see the kind of innovation that keeps me excited about their products. I want exciting new services. Not just a new iphone that has a slightly better camera.
Frankly, if I am leadership at a company I want those things too, but if my hands are tied by investment then I might not have the freedom to pursue long term investment in my people and products. If it represents risk to the ownership then those things are going to be low priority.
So, what does Michael Dell have to say about his privatization of his company with the help of the capital firm?
He references that a McKinsey report notes that :
“that (companies) using a longer time horizon to make business decisions would positively affect corporate performance in a number of ways, including strengthening financial returns and increasing innovation ”
He goes on to remark :
“This was what Dell faced as a public company. Shareholders increasingly demanded short-term results to drive returns; innovation and investment too often suffered as a result. Shareholder and customer interests decoupled.”
Business 101 says a misalignment between your leadership and their products with your customers, can begin a long term leaching of customer goodwill. In the case of many major companies this might be a very long term demise.
Take Borders books which in 2010 was operating 500+ stores in the US, which was also totally incapable of innovating in advance of the rise of the digital industry. For the sake of my arguments I would like to pretend that it was the fealty to the shareholders that was an impediment to the company.
I work in the Cruise Industry which has a recent announced shake up that the Virgin Group as a venture capital organization in partnership with Bain Capital, is going to open a cruise line. If it were anyone else this may be boring news. However, the idea that Sir Richard Branson is going to use a company construct that does not answer to stockholders, to enter a competitive industry, speaks to the opportunity Virgin sees in the space.
Do Private Companies do better than Public?
Hard to tell, as private companies do not have the same public reporting that their Public cousins do, but that isnt the point. ( Often their financial performance remains the same)
Michael Dell did what he did to get control of the future of the company. The leadership of Dell now gets to call ALL the shots. They can innovate till they turn blue in the face, or they can continue with business as usual.
This leads me to believe there will be a major increase in major privatizations. More companies will follow suit because they will see the kind of impact they can have on their employees and their respective industries. This will also allow the he strengths of the innovators to come to the front lines. This will leverage the creativity of the future generation of white collar labor, and open the analytic financial professionals to focus on improvements over reporting.
Revenues may be the same, but as a nation lets hope we can get Wall Street to relinquish a little bit of the hold they have on our innovation.
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