DELL-USIONAL SEPTEMBER 17, 2013
The stock market is a giant rip-off of middle-class investors.
Don’t take my word for it. Take Michael Dell’s. Dell took his computer manufacturing company public in 1988—that is, he sold stock in the company to anyone who wanted it. Now he wants to buy it all back, because he shares the widespread belief that it’s better for a company to be privately owned.
Maybe it is, and maybe it isn’t. These theories come and go. It used to be thought that the separation of ownership and management was the most brilliant innovation in the history of capitalism. Now they say the opposite: that managers perform better if they have skin in the game. Whatever.
What seems to be more profitable than either approach is both, in turns. It’s like “flipping” in real estate. You go public, raise a lot of money, then you take the company private, slap on a coat of paint, then you go public again. This is a rip-off of small investors in two senses.
First, if it’s true that owner-management is the best way to run a company, then public shareholders are out of luck because they can’t buy into the company once it’s private. In fact, they are forced out just as the supposedly superior management takes over. Even if there is a shareholder vote before the deal goes through, it’s majority rule. No individual shareholder can stop a deal once it’s in motion. Well, maybe Carl Icahn.
Second, as in Dell’s case, the new management is often the same as the old management. They are well-paid. If they know a way to improve the company’s performance, they should be doing it already on behalf of the stockholders who pay them. Not to do so until they own the company themselves is a grotesque violation of their fiduciary duty. Management even gets to set the price at which they buy the company, albeit with some of those troublesome regulators looking over their shoulders.
Dell at the moment is a public company, traded on the NASDAQ. In February, Michael Dell proposed to buy it from the stockholders for $24.4 billion. After a few months of back and forth, and the uninvited intervention of dealmaker Carl Icahn, the company’s board of directors agreed to sell the company to Michael Dell for $24.9 billion. Icahn gets $70 million, as a sort of tip.
Dell stock has dropped 31 percent in the past five years, and everybody says the PC, which is Dell’s bread and butter, is headed for the scrap heap. But Michael Dell thinks that going private can help to turn that around.
Why? Dell says, “This is a great outcome for our customers and our company…. We are going back to our roots, to the entrepreneurial spirit that” etc. etc. etc. “Creativity and confidence…hallmarks of our culture…” etc. etc. “We plan to serve you, our customers, with a single-minded purpose and drive the innovations,” etc.
Actually, this isn’t entirely baloney and gobbledygook. Reading between the lines of Dell’s letter to customers, on the company’s web site, Michael Dell is appealing to that widespread belief about the superiority of privately owned companies: They are faster on their feet because they aren’t burdened by all of the obligations to shareholders and heavy-handed regulations of companies that are publicly traded. Publicly traded companies, according to this school of thought, worry too much about short-term volatility in their stock price, whereas a private company can take the longer view, which tends to be the better view in the end. Or at any rate, that’s the theory.
In a memo to employees, Dell wrote, “I believe that we are better served with partners who will provide long-term support to help Dell innovate and accelerate the company’s transformation strategy.” This, decoded, is a dig at public stockholders who, he is suggesting, are unreliable partners. Like birds on a wire, they fly away en masse at the slightest disruption.
Dell and the many who share his view may be right. But if so, then the stock market is a giant fraud being perpetrated on the American middle class, which has embraced stocks as the best way to guarantee their retirements. And they do this, not out of some irrational impulse (like the one that impels them to buy Lotto tickets), but because that is what they’ve been told by politicians and business leaders.
Common stocks, and mutual funds, are not merely touted as the best long-term investment for individual citizens. They are also promoted as the best system for allocating society’s capital and directing it to where it can do the most good. Now, it seems, that is not true either. Apparently the best way is to have companies—even unimaginably large companies—owned privately and unavailable to individual investors.
This new insight will require rewriting of a lot of propaganda about the stock market in tourist brochures about Wall Street, along with 40 percent or so of any given issue of Forbes. When Dell stock went public in 1988, there was no talk about how much better off the company would be if only it could stay private.
The New York Times paraphrases some of the investors who helped to finance the Dell deal: “Taking Dell private, they contend, removes many of the headaches of running a public company, particularly having a highly visible stock price that investors take as a measure of health. With just themselves to report to, their argument goes, the company can afford to bide its time and take on more risk.”
Well, maybe. But I’ve never understood why shareholders should be so overly concerned about short-term stock price performance, or why short-term share-price volatility should affect the company’s management, if it’s as clear as the people pushing this idea say that a long-term perspective is better. Are they—shareholders and management both—idiots?
The long term is just a series of short terms, and no matter how briefly a share of stock is held, there is no reason its price shouldn’t reflect the company’s long-term prospects, as best anyone can determine them, or why it should cause the company to follow policies that are against its own long-term self-interest, which is clear as glass to financial journalists but apparently opaque to the company’s own managers—until they own the company.
Whatever they say when trying to buy the company—and whatever they actually believe—the private buyers often don’t wait for the long term. They sell at the first opportunity. That’s what Hilton, the hotel chain, is in the process of doing. The Blackstone Group, one of the best-known private equity firms, took Hilton private in 2007 for $26 billion. Now it’s expected to double its money when the company goes public again.
Hilton will be more or less the same company it was before 2007, only burdened with billions of dollars of new debt. Blackstone, presumably, is no longer touting the enormous advantages of private ownership as it peddles this company back to the public.