One of the most important things that determines how competitive the economy will be in the longer-term is how corporations are run: Who owns them and how their executives are selected and compensated.
In an ideal world, corporate governance would serve everyone well. Shareholders would be able to easily sell their holdings when they needed the cash—but also would be patient enough that management could think long-term without seeing their share-price walloped. Board members would be independent-minded representatives of shareholders and drive a hard bargain on executive pay—yet also able to work closely and collaboratively with executives to come up with the best strategy.
In other words, figuring out how to run companies effectively is full of trade-offs, and knowing what is “best”—the mix of policies and practices that will lead to the strongest economy in the long-run—isn’t entirely obvious.
All of which brings us to the case of Dell Inc., the computer company facing one of the stranger corporate governance standoffs in recent times. Regardless of what the future holds for Dell, it is a case study in how the actual dealmaking that captivates corporate America doesn’t have any coherent theory behind it of what would make American companies more competitive.
A quick refresher. Dell Inc. is a publicly traded company, its shares owned by millions of investors through the Nasdaq exchange. Its chairman and chief executive is, and has been since its founding, Michael S. Dell, who also owns about 16 percent of those shares.
Dell the company (and the man, for that matter) had a long and successful run as a leading maker of PC’s, but as more and more computing is done on tablets and cell phones, it has struggled to keep up. Its revenue fell to $57 billion in the most recent fiscal year, down from $62 billion a year before. Its share price has been pummeled; from about $18 this time a year ago to a recent low of less than $9 a share in November.
Michael Dell believes the market has been unfairly pessimistic about Dell Inc.’s prospects. Fair enough; the same could be said by plenty of executives. One solution would be to buckle down and prove the markets wrong by using your place in the CEO suite to buckle down and prove the doubters wrong. Michael Dell has taken a different path, setting up something strange: A battle for control of one of the world’s leading PC makers in which there is no coherent theory or offer as to what is wrong with that PC maker to begin with. He and private equity firm Silver Lake Partners have offered to buy out public shareholders to the tune of $13.65 a share, aiming to take the company private. A special committee of the board has also entertained other offers and, surprise, got two that are on the face of things better than what the Silver Lake group was offering, $14.25 from the Blackstone Group and $15 from billionaire buyout king Carl Icahn.
The interesting thing about these competing offers is that they seem to offer competing, and directly contradictory, theories of what is wrong with the corporate governance of Dell today and how it can be turned around.
There can be any of several theories behind a buyout offer for a company. One is that current management is incompetent, and new managers will run the company better. Another is that the publicly traded governance structure is a poor fit for the company—that having to answer to impatient shareholders is leading management to be unable to make good decisions for the longer-term, for example. A third possibility is that the acquirer is a competitor or in a related field, and they will be a better company through the combination.
None of the bidders for Dell seem to be embracing the third theory; the bidders do not include Apple or Hewlett-Packard, for example. And the different bidders seem to be coming from different places on possibilities 1 and 2.
Icahn and Blackstone seem to be embracing theory #1. The Michael Dell management team isn’t running the company well enough, and they are convinced that they can do better—so much better that they’re willing to pay even more than the Michael Dell/Silver Lake group. They don’t even have a tinge of #2 in their theory. They are both envisioning keeping the company public, taking over the majority of shares but leaving a “stub company” of remaining public shareholders. In other words, all the burdens that come with being public—the SEC disclosures, the short-termism that can result from public markets, the need to deal with investor relations—wouldn’t go away under Blackstone or Icahn. Only the existing management team would; that’s right, by trying to fully take over the company he founded, Michael Dell might end up losing control of it entirely.
The Michael Dell/Silver Lake group seems to have the opposite view of what ails Dell Inc. They apparently see ending the company’s publicly traded status as the crucial step to unlock hidden value in the company. After all, they are looking to keep Michael Dell as CEO, but to strip him of all those hassles attached to having public shareholders. They haven't been very specific about what strategy changes they envision, or why current CEO Michael Dell hasn't already undertaken them.
The Dell board will have to weigh these offers in the days ahead, and choose whichever one they think is best for current shareholders. But they will also be betting on which vision of corporate governance—different managers but still with public shareholders, or a private ownership group with the same managers—is the best one for one of America’s great business success stories of the last generation.