Perhaps one of the first few terms one learns in a Wall Street course is initial public offering (IPO). Every year several companies choose to take their private company public by selling stocks of their company as a way to gain a trading position in the stock market to acquire the capital they need to expand. Most recently, companies like Facebook, Zynga, and Groupon made headlines when they went public.
Rarely, however, does one hear about a public company going private. There are numerous benefits of being a publicly traded company, namely the abilities to raise capital, to fund research and development, pay off existing debt, and gain company publicity. Yet, in early February, CEO Michael Dell and technology investment firm Silver Lake Partners announced their intentions of taking one of the largest PC vendors, Dell, private in a $24.4 billion buyout deal. Motivations for this deal stemmed from the inability of personal computers to compete against the recently booming smartphone, tablet and other consumer-preferred lighter device markets, as evident by Dell’s recent plummeting stock market performance and twenty percent decline in fourth quarter company shipments. Furthermore, the severity of the ‘end of PC era’ is showcased in the general consensus that personal computers will eventually be replaced by smaller devices for email and Internet applications and rather, be used solely for complicated document execution in the near future.
Despite the infrequency of privatization, its numerous advantages are worth examining for all companies facing competition in the equity world. First, the reduced regulatory and reporting requirements that come with privitization allow company management to devote their energy to growing the business. Although Dell will still be obligated to report to its private investors, privatization will free the technology giant from the pressures of meeting quarterly earnings expectations and allow them to focus on long-term shareholder wealth accumulation. Thus, many contend that “take-private” transactions, in which large private equity groups along with firms purchase stocks of publicly traded corporations, will become increasingly popular in an economy where low-risk and high returns make for the perfect combination.
Whether this recent lack of consumer confidence both in Dell and in the company’s main product, the personal computer, will persist remains as uncertain as the technology industry’s stock market volatility. Last Friday, the Blackstone Group officially ended its bidding operations for Dell upon learning that the company experienced a 14% market decline in PC volume during the first quarter of 2013, the steepest product drop in technology history. The technology sector usually receives a large valuation on stock value because it is assumed to be a growing industry. But with the rise of mobile and tablets, this notion is being called into question; not unlike the idea that a public company would go private.
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