Dell and Best Buy—Going Private Can Be RiskyJeffrey Pfeffer
A possible Dell leveraged buyout seems a lot like founder and former Chief Executive Richard Shulze’s putative offer for Best Buy. In each case, you have a founder of a once-successful company who believes that the stock market undervalues his baby, and that once private and under even more of the founder’s control, there will be greater opportunity to fix a threatened business model.
These proposed buyouts could be merely instances of several personal biases in action. One such bias is escalating commitment to a failing course of action, so that leaders don’t have to admit that they made mistakes or that they are not as competent and heroic as they would like to believe. Another is the illusion of control, demonstrated by social psychologist Ellen Langer, among others. This illusion that people are efficacious is why they are willing to bet more money on dice if they get to roll them. Then there is the above-average effect, which causes people to overestimate their capabilities and skills—something that would surely beset CEOs, who are, after all, more talented than others. This would cause CEOs—present and former—to believe that if they could just get more control over the enterprise, everything will get better.
Both Dell and Best Buy have wonderful stories. Dell, founded in Michael Dell’s dorm room, transformed how personal computers and then laptops were manufactured and priced. Best Buy, with its emphasis on the customer service experience, changed how electronics got sold. But in both instances, some fundamental industry dynamics have changed. Not only does Dell now face competitive pressure from Lenovo in PCs and Visio and ViewSonic in televisions and monitors, but also, more importantly, the core of Dell’s business is disappearing as the PC and laptop markets shrink.
Zia Yusuf is CEO of Streetline, a 50+ employee startup selling sensors and analyzing parking data for cities and private garages. He recently told me that there was not one PC in his entire company—lots of cloud-based server capacity to do the data collection and analysis, for sure, but no traditional PCs or laptops sitting on desks. PCs and laptop are getting replaced by iPads and devices running Google’s operating system, while Amazon and others offer computing resources in the cloud for data storage and processing-intensive analysis. In electronics retailing, Amazon and other online retailers have devastated Best Buy’s business. Neither of these trends shows signs of abating.
In Dell’s case, some analysts suggest that once it’s private, Dell can migrate to a software and services model. That is much easier said than done, as Hewlett-Packard has learned. Even the presumed exemplar of such a transformation, IBM, still earns a surprisingly high proportion of its profit from a mainframe business that has been revived by the growth of big data and the disappearance of most of the company’s mainframe competition. Furthermore, a private Dell will likely have to service a sizable debt load, presumably hobbling any efforts to make significant acquisitions or major investments in R&D to accelerate its move into software and services.
Which raises the question: If these are dying enterprises, why would private equity investors be interested in the transactions? The answer, of course, is fees and the possibility for the investors and other insiders, such as senior executives, to make money even if the companies eventually fail. The story of Simmons, the mattress manufacturer, is instructive. Thomas Lee Partners took lots of cash out and made a great return even as the company went bankrupt. At Station Casinos, which also went bankrupt after it went private just before the economy tanked, company insiders took out hundreds of millions of dollars as the company failed, causing creditors to sue.
Going private creates lots of money—for lawyers, investment bankers, and other parties who benefit from the fees generated. Whether these transactions will ultimately salvage either Dell or Best Buy is much less certain.