Following a nearly year-long battle by Dell founder and chief executive, Michael Dell, to revert the company to private ownership, shareholders have finally approved the deal. What are some of the lessons we can learn from this ordeal?
Yesterday, 12 September, shareholders in one of the world’s leading computer manufacturer, Dell, approved a USD 24.9 billion deal to make the company private. Dell is currently listed on the United States NASDAQ and Hong Kong Stock Exchange as a publicly traded company. This deal will return the company to private ownership thus allowing its principals, including founder, Michael Dell, greater strategic control.
The move by Dell to re-privatise is not unprecedented, though it is not often that a company of its size seeks to be delisted from public stock exchanges. At some point in their lives, many businesses, and tech/ICT businesses in particular, need significant capital injections to take them to the next level, and opening up ownership (to the public) can be quite lucrative to the firm and its principals. Hence by no means does this post criticise or condemn the need for companies to secure external funding and support in exchange for shares or some other stake in the business. However, there are a few takeaways from the recent turn of events at Dell that entrepreneurs and business owners should consider.
Be prepared for a change in focus of the business
In having a publicly listed company, or any arrangement where a considerable increase in the shareholder base occurs, frequently the business’ primary objectives change from whatever the principals might have initially envisaged, to ultimately making money for their shareholders. Hence imperatives related to revenue, dividends and share value can overshadow strategic decisions that might not be as profitable now but could yield substantial returns in the future.
Businesses can become risk averse
One of the greatest strengths of a privately-owned business can be its ability to be responsive to developments within the markets its serves or completely new situations for which strategic decisions are needed. However, having a larger (or even more vocal) shareholder base can make a business risk-averse and more inclined to stick to “tried and true” approaches. Although conservative practices might not necessarily be a bad thing, in industries, such as ICT/tech, that are highly competitive, that thrive on innovation and thinking differently, companies that had an edge as private concerns can become ‘ho-hum’ when publicly traded or in circumstances where shareholder interests are a primary preoccupation.
Regaining control can be costly
Relatively speaking, it is easy to trade stock or company equity for financing or business support, but it might not necessarily be as straightforward to reverse the process. The deal Dell has finally struck is the culmination of an arduous process announced in February this year, and the final price is higher than the initial offering that had been proposed. Additionally, according to ZDNet, there were “attempts to derail the process or take the company out of the hands of the computer maker’s founder”. Hence company principals must be prepared to have the resolve and the resources to see such a life-altering transaction to the end.
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Although I am not very up-to-date with this Dell deal, my comment is more general and more in terms of the three points raised.
My opinion is that one of ( if not ) the frequently observed sticking points in the so-called “Agency Problem”, is the inability, on the part of the agents ( business officers ) to communicate strategy to the shareholders.
Shareholders do not craft strategy, and often may not even fully comprehend its basic thrust when presented, especially if presented in business esoteric language.
When shareholders have not fully appreciated what’s been proposed, they will develop cold feet. Conversely, when they have understood the strategy and the eventual benefits thereto, they will support it.
The latter circumstance, enables control, risk taking and business focus.
Thanks for the feedback, Kamutula, and interesting point on the “agency problem”.
However, although it might be possible to secure shareholders’ support for difficult strategic decisions a firm might want to make, depending on the size of the firm and the number of shareholders involved, it could be a logistic and expensive nightmare.
In the case of Dell, and firms that trade on the major stock exchanges, they may have hundreds of thousands of shareholders, so having the level of consultation or engagement necessary to communicate the company’s strategy successfully might be near impossible. Further, shareholders typically see their investment in a company as a means of increasing personal wealth and as a source of revenue. Basically, they want share value is maximised and that firm does well enough to pay dividends regularly.
Hence ultimately, there might inherently be a disconnect between the shareholders’ desires and those of the company’s principals, when can result in the tension and struggle Dell experienced in order to be in a position to make critical decisions hat affect its long term viability.