A pair of deals announced this week highlight the two major categories of merger-and-acquisition activity. The Liberty Media Corp.'s acquisition of Virgin Media assets represents a conventional "buy market share when organic growth slows" strategy. The second, Dell Inc.'s attempt to go private, is far more interesting. It calls into question the advantages of being a public company at a time when corporate debt remains so cheap.
If the deal goes through, Dell will pay less in interest in the next three years on the $24.4-billion (U.S.) borrowed to buy back all of its publicly traded shares than it had paid in dividends and open-market share buybacks in the past three years. The private company will avoid all of the shareholder and regulatory scrutiny involved with being publicly traded, while also saving money.
The speculation, best outlined by Reuters' Felix Salmon, is that Dell is going private to accomplish a massive restructuring plan without the pressure of keeping shareholders happy with quarterly earnings growth. But it almost doesn't matter why the deal is taking place. If more firms calculate that going private is the cost-effective option, the Dell transaction could prove a watershed event for markets – with easy access to debt markets at historically low rates, there is simply little reason for companies to remain public.
Privatization will be highly attractive to the stereotypically colossal egos of large companies' CEOs. Responsible solely to a small number of big debt holders, they will be able to flex their biz-school muscles and restructure their companies as they see fit, away from the prying eyes of media (disclosure rules for private companies are far more lax than for public) and shareholders.
Large private equity (PE) firms will also be motivated to finance privatization, and not just because funds are cheap to borrow. Companies like Bain Capital have proven that huge gains can be made by funding the restructuring of companies and then issuing shares back onto the market when completed. The usual PE manoeuvres – borrowing large sums and paying them out as special dividends to debtholders is the most common – will also be at their disposal.
As a precedent, the privatization of Dell is a very big deal. Many companies will now begin to study the possibility of removing themselves, at least temporarily, from global stock markets. The longer that corporate debt rates remain low – and the high levels of market liquidity provided by central banks suggests they will for a while – the fewer options retail investors may have for their savings.
Scott Barlow