Whether you have ever invested in the stock market or not, most people understand the basic workings of the stock exchange and the difference between a public or privately held company. In the last year we saw Facebook go public through their Initial Public Offering (IPO) and suffer from horrible losses in the first weeks. Now we are seeing another large company, DELL, potentially go the opposite direction and privatize.
First some background: Most companies start out being private, with the securities (or shares) of the company being held by a relatively small number of people. Many companies will go public through an Initial Public Offering (IPO) as a way to raise capital for large ventures or expansion. If a company again needs to raise capital, they can do this by increasing the number of shares available to the public in a secondary offering (or however many they do). Companies can distribute profits to shareholders through a dividend, where a certain amount is given per share. Of course, the problem with being a publically shared company is being forced to publically share your financial information. A publically-owned corporation is required to regularly report on their performance, which could potentially be valuable to competitors.
A private company, on the other hand, is owned by a small number of shareholders who do not offer shares of the company on a public stock exchange. Private companies are barely required to share any information of any kind with the public, so they can protect their interests. While they are less widely known than public companies (probably because we aren’t constantly bombarded with their acronym and daily stock price), some major corporations are privately owned; S.C. Johnson, IKEA, LEGO, and Rolex are a few examples.
Just like a private company can go public by offering shares on the public market, a company can also be privatized by having an individual or small financing group purchase a controlling share in the company. Think of Bruce Wayne buying 51% of the shares of Wayne Enterprises after they tried to force him out in Batman Begins – this is basically the same thing. This is the situation that seems to be happening with Dell Inc. as they try to refocus the company amid sales drops. With the rise of tablets and smartphones, the PC market is dwindling, and Dell is falling with it. While Dell is trying to sell itself as an all-around supplier of services, software, and hardware, it is instead simply labeled as a PC manufacturer. Many people view this privatization as a means for Dell to cut off the dying limbs of the company, drastically restructure and re-brand, then present the market with a leaner, more focused company that actually knows what it wants to do. Others think this will just make it easier to sell off the company’s holdings before it dies completely.
So just who is looking to buy Dell? Well that would be Michael Dell, yep, the founder and Chief Executive Officer of the corporation. While he currently owns about 15% of the company shares, Dell is reportedly working with a private equity firm, Silver Lake Partners, to buy a majority share of the company. While this is only speculation and rumour at the time of writing by publication, the deal may have actually gone through, as it could to be completed by Monday, February 4. Interestingly one of the companies offering to help finance the privatization is Microsoft, which could then gain a vote in decisions at Dell. So what is the motivation for this? Well, it is only speculation at this point, but the most obvious outcome would be that all Dell products would sell with Microsoft operating systems and software (which they mostly do already). But then there is also the question of Microsoft entering the hardware business themselves, so they will likely be in competition with Dell. So is this then a way to stifle a potential competitor or could this be Microsoft’s way of entering the hardware market?
So by publication, this deal may be already settled and Dell will no longer be a publically traded company. They then may disappear for a while to rethink market strategy and organization and return as a better, more focused company…or this whole thing could fail entirely and the company goes bottom up; either way it should be interesting to watch.
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