‘It’s incredibly clarifying.’ The speaker, quoted by a reporter in a recent interview, was reflecting on the benefits of having just taken private the company he headed. Freed from the quarterly obsessions of Wall Street, he illustrated the point, describing the newly private company’s ability to focus on just two key metrics: cash flow and growth.
Untethered from the daily scrutiny of shareholders and analysts, he looked forward to making investments in R&D and acquisitions necessary to transform the company. Unfazed by the financial pressures of going private, he pointed out that added debt service was less than the company had been paying out in dividends and stock buybacks in recent years.
You have probably guessed the speaker was Michael Dell. Interviewed recently by Forbes after successfully beating activist shareholder Carl Icahn and completing the year-long effort to go private, Dell was able to speak freely for the first time in 12 months. That the founder of the eponymously named PC maker had long been looked on as the archetypal tech IPO billionaire further underlined the significance of his journey from public to private.
While Dell’s saga is inextricably linked to the complex and fast-changing nature of tech markets, the largest (by revenue) going-private transaction at $25 bn poses the question: why be public? Usually, smaller companies that cannot attract enough institutional investor sponsorship are prime candidates for going private.
Dell, on the other hand, is a multi-billion-dollar global tech giant, albeit one that has undergone significant challenges in recent years. While IPO activity has rebounded to near pre-market meltdown levels, much of that activity is coming from emerging markets. Equity commissions paid by US institutions have fallen by about one third over the past four years, according to Greenwich Associates. Layoffs at equity desks have followed and the shrinkage of research continues.
IR professionals face an emerging set of challenges with little precedent and in a market structure that does not engender confidence. When algorithmic and high-frequency trading make up the vast majority of any company’s daily volume, a misplaced order and a bit of weak code can send prices into a breathtaking dive and an equally dizzying recovery or close down an exchange for hours. And where much of the trading occurs off-market in dark pools and ownership is becoming increasingly difficult to ferret out, we’re in new territory.
In such uncertain times, it’s worth returning to a few basic truths:
1. The vigorous M&A activity among global markets is testimony to the fact that markets matter. The ability to bring interested buyers and sellers together where price discovery and execution can occur is a valuable utility.
2. Investors (as opposed to traders) are interested in three things: the markets your company operates in, the products or services you bring to those markets, and the management team that leads the effort.
3. Integrity and credibility matter. While never cited as a reason for going private, the fact that information allegedly leaked from within the company was part of an insider trading enforcement action last year must have disheartened Dell and the board. Whenever I used to get pressured to give an analyst or portfolio manager an ‘edge’, my response was always the same: they could be assured none of their competitors on the Street would have an information advantage over them. I doubt that ever assuaged those who pressured me, but analysts who knew me well over a long period of time were confident they were operating on a level playing field.
No matter the uncertain times, IR remains at the critical junction between the company and investors, presenting company management and strategy to the financial markets and bringing the outside-in view of investors back to management and the board. That, too, is clarifying.
