First Dell arranged a leveraged buyout to take itself private. Now BlackBerry is making a similar move, working with its largest investor Fairfax Financial in a proposed $4.7 billion deal. Does this mean the market climate is changing to allow other ailing tech giants to make similar moves?
The rationale is simple: It’s about time for a turnaround. Large-cap tech as a whole has been valued cheaply for some time (even Apple is trading at 12 times earnings, while the S&P 500 average PE is 20). Turnarounds take years, and investors demand progress every quarter or they drive share prices down further. Better to make bold moves beyond the glare of public investors.
While several large cap tech giants—Hewlett-Packard, Microsoft, Nokia among others—are weathering flagging stock prices and antsy investors, it’s unlikely we’ll see a wave of others going private. There are several reasons why not, but in short, the factors driving Dell and Blackberry into private hands are unique to their own situations.
-Both of these deals involve a huge amount of risk. Dell’s turnaround will need a few years at least to show signs of success, and in the meantime the going will be grueling. Should Blackberry go the same route, it will emerge into an even more cutthroat mobile industry. Any tech company watching to see if these moves are bold bets or just dumb ones will need to wait a while to know.
-Going private is not an easy path to success. Just ask Michael Dell, who entered a seven-month, unseemly wrestling match with Carl Icahn, one that very nearly lost him his job running the company. Blackberry may well be sold off in pieces to other companies before it has a chance to turn itself around. The process can easily become a distraction to employees and customers.
-Going private is just one step for Dell/Blackberry. Both companies have a long-term strategy, and being private is a necessary part of those plans. Dell is girding its strenghts for a price war with Asian manufacturers. Even if this works for Dell, won’t work for other us manufacturers. Whatever Blackberry does to create a future in mobile devices, it’s highly unlikely it work for, say, Nokia.
-The history of tech LBOs is not a pretty one. Most companies that benefit from LBOs are in other industries like hotels or health care. Tech evolves so quickly that the life cycle of tech giants seems accelerated. Recent tech LBOs like SunGard Data and First Data are hardly home runs for the private equity firms that backed them.
-Banks were never dying to back risky megadeals. Dell may not have gone private had its founder not put up so much of his own capital. Blackberry’s savior – the Warren Buffet of Canada – brings a bit of national pride to the deal.
-Capital is growing scarce. The Federal Reserve will be tapering off its generous policies for a while. What money is left to invest in tech stocks will go to younger, growing companies like Facebook. And even with the economy slowly recovering, we’re unlikely to see private equity firms join forces as they did before the last recession.
Large tech companies that aren’t seen as being at the forefront of consumer technology will continue to languish with sluggish stock performance and low valuations. But we’re not likely to see a wave of companies taking themselves private. More likely, we’ll see activists investors prey on weaker companies. Unlike Dell, it won’t be to make an old company stronger. It will be to maximize investor payouts.