Why do public corporations remove their shares from stock markets to become private corporations?
Why do some public corporations choose to go private and delist their shares from stock markets? On October 29, 2013, Dell announced that miguel dell, founder and CEO, and silver Lake Partners, a leading global technology company completed the acquisition of Dell’s outstanding shares. Michael Dell said he can focus on building the company, “not on the 90-day shot clock” of continually worrying about profits. Also, going private will give your business the “time, investment, and patience” to progress. In fact, they made progress. And five years later, Michael Dell plans to take Dell public again, for starters!
Public corporations going private for a long-term focus
Many public corporations choose to be on a profit treadmill to satisfy Wall Street’s appetite. They believe they must publicly provide a quarterly earnings estimate (guidance) or their stock will not trade at its optimal values. So they focus on next quarter’s earnings and had better be precise. Otherwise, traders on the Stock Exchange could hit their shares.
drink Walmart. On Wednesday, October 14, 2015, its CEO announced that earnings would decline in the next fiscal year due to targeted spending to position the company for growth. Shares fell 10%, the steepest one-day drop in 25 years. Director doug mcmillon told an investor meeting in New York: “We can deliver stronger short-term financial performance simply by better managing our core business, but that won’t be enough.”
Nearly three years later, stocks rallied; today, stocks are significantly higher, proving the CEO right. HAS McKinsey Company The 2006 study shows that quarterly earnings guidance does not provide the benefits claimed by corporations and is not worth the costs of providing them:
“Our analysis of the perceived benefits of issuing frequent earnings guidance found no evidence that it affects valuation multiples, improves shareholder returns, or reduces share price volatility. The only significant effect we see is an increase in trading volumes…”
Other reasons for a company to go private include less scrutiny of results by the public, more flexibility, a sharper and more consistent long-term focus by management.
Dell plans to become a public corporation…again!
Ironically, after five years, Michael Dell plans to take the company public again. Why would he do that? That he has changed? As a private company, in September 2016, Dell acquired tech giant EMC for $67 billion. Unlike Dell, which is primarily hardware, EMC was primarily software. Following the acquisition, Dell changed its name from Dell Computer to Dell Technologies to signal the move away from hardware. If Dell were a public company, it would be heavily scrutinized by analysts, criticized by some, and generally distracted by Dell management.
No doubt Michael Dell and his partners are ready to cash in on Dell’s increased valuation for building the company over those five years. It will be interesting to see whether Dell chooses to return to the quarterly earnings treadmill or stay out like Warren Buffet and other executives.
Taking a public corporation private can be expensive. However, being private can give owners time to restructure without distractions from outsiders. Close scrutiny by short-sighted analysts could result in unhelpful comments that may require thoughtful but unnecessary responses. Unfortunately, Wall Street’s focus is solely on making money today, not on the long-term viability of the public corporation.