So you are set on taking your company private. Well, before you put your plans in motion, there are a lot of risks and potential consequences to consider along with the benefits. At the moment, no one knows this better than Michael Dell, CEO of Dell Inc.
Back in February 2013, Mr. Dell and his financial partner, Silver Lake Management LLC, entered into a merger agreement with Dell that would make Dell a private company. The merger was valued at $13.65 per share, with a deal value of $24.4 billion. The deal would keep CEO Michael Dell and others in his investment group in charge of the company.
The driving force behind the deal is the perceived need to restructure Dell due to fundamental changes in the computer industry. Consumers are focusing more on tablets and smartphones, which is hurting Dell’s core computer business. The thought is that the company needs a couple years to restructure and that being a private company would allow the restructuring to occur without so directly impacting the price of the stock. Since most investors these days have shorter time horizons and less patience for restructuring, this looked like a smart move.
As negotiations progressed and the deal was announced, however, the door was opened for other offers because Dell was in play. This is one of the uncertainties involved with a going private transaction and makes this type of deal more risky. In particular, there is the risk that the initial group loses control of the bidding process and gets out bid.
Here, despite initial thoughts that no other parties would top the Silver Lake bid, two additional bids that are arguably superior have surfaced and make the outcome uncertain. One of these bids is lead by investor Carl Icahn and the other is lead by Blackstone. Both bids were deemed by Dell’s special committee to be potentially superior to the bid from Mr. Dell and Silver Lake. With these new bids, the certainty of the outcome is up in the air and there is a lot of negotiating going on behind the scenes. This uncertainty is another one of the risks that comes along with trying to take a company private.
At the center of these additional bids for Dell is the “go-shop” provision in the Silver Lake merger agreement. These provisions are typical in these types of deals and all the company to attempt to seek a higher price. Usually, the original bidder gets an unlimited number of times to match higher bids in this process. However, in this case, Dell agreed to only get one chance to revise its original bid. This presents a substantial risk that Silver Lake may not be able to retain control of this deal.
Another risk is that other bidders may make management changes. In this case, Mr. Dell must be wondering if, once the dust settles, he will still have a job at the company he founded. Some of the candidates that are being floated are Mark Hurd, the former CEO of Hewlett-Packard, and Michael Capellas, the former head of Compaq Computer and First Data. Blackstone has indicated that Mr. Dell is its first choice, but having other options gives them additional strength in the negotiations.
A further risk is that a subsequent investor group will have different plans for the business. Here, it has been reported that Mr. Dell is not happy with Blackstone’s intention to help finance its bid by liquidating the Dell division that makes loans to customers for buying Dell products. These types of differences can dramatically alter the way the company looks and operates after going private.
In the end, an initial bid to take a company private may be a good plan, but it starts a series of events that may cause the target company to look substantially different in hindsight. Now, only time will tell for Dell and how it will look and operate going forward. So if you are considering going private, make sure to factor in the possibility that you could lose control of the buyout process, management may be different after going private and other investors may have different plans for the company. The risks and uncertainties of this process should be carefully considered before any attempt is make to go private.