By Mark Hulbert
CHAPEL HILL, N.C.--Dell Inc. (DELL) has a better shot at success
as a private company, right?
I am not so sure.
Of course, Michael Dell himself, along with Silver Lake, a
private-equity firm, would like the company's shareholders to
believe the contrary. They are offering to take the company private
through a leveraged buyout valued at $24 billion, reasoning that
the computer manufacturer has greater odds of long-term success
once it is freed from the need to meet Wall Street's short-term
earnings expectations and therefore can truly invest in ways that
promote long-term success.
But a fascinating recent study found no evidence that public
companies undergoing LBOs do any better, on average, after going
private.
The study was conducted by three researchers at the University
of Texas at Austin which, ironically, is just down the road from
Dell's headquarters. Because the study was completed last November,
it does not focus on Dell's proposed LBO. Its authors are Jonathan
Cohn, a finance professor at that university, Lillian Mills,
chairwoman of its accounting department, and Erin Towery, a PhD
candidate there.
Prior to this study, researchers had been unable to study the
performance of companies undergoing LBOs because, by definition,
they are private and the data were unavailable. But the authors of
this new study overcame that difficulty by obtaining confidential
corporate-tax-return information from the IRS for companies going
private. Armed with this data, they were able to examine the
operating performance of 317 LBOs between 1995 and 2007.
They found "little evidence of operating improvements subsequent
to an LBO."
Of course, these LBOs on average didn't suffer a significant
diminution in operating performance either. Might that be seen as
something of a victory, since companies undergoing an LBO might be
suffering at the time they go private, as indeed some consider Dell
to be right now?
Mr. Cohn, in an interview, discounted this possibility. He and
his coauthors studied LBO performance in a number of different
ways--including comparing each of the LBOs they studied to a
control group of companies that did not go private. They found no
significant difference in the operating performance of comparable
companies that stayed public and companies that underwent LBOs.
To be sure, the researchers' result is based on an average of
the 317 companies they studied--and some did better than that. So
there is no guarantee that Dell won't be able to beat these
odds.
But if it does, it is doubtful that its success would be caused
by its being private rather than public. That is because, as Mr.
Cohn stressed, there is no evidence that not being public, in and
of itself, is the benefit that private-equity firms would like us
to believe.
Given what this study has found, you might be wondering why
private-equity firms are so eager to help companies go private
through LBOs. One answer might be a finding of a number of other
research studies: Private-equity firms funding LBOs do earn excess
market returns. These other studies' findings, in conjunction with
those of this recent study, suggest that private-equity firms might
be extracting exorbitant payments at the expense of the LBO
companies themselves.
If so, this might help to explain why Silver Lake, along with
Michael Dell himself, are so willing to put up such large sums of
money to purchase Dell--and why some other large shareholders, such
as Southeastern Asset Management and T. Rowe Price, are so opposed
to the proposed LBO.
In any case, this new study suggests that investors should stop
assuming that it is automatically a Bad Thing for companies to
suffer under the spotlight provided by Wall Street's scrutiny of
quarterly earnings reports.
(Mark Hulbert is the founder of Hulbert Financial Digest in
Annandale, Va. He has been tracking the advice of more than 160
financial newsletters since 1980. Follow him on Twitter
@MktwHulbert. He also is a contributor to MarketWatch.)
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