I read about Dell’s decision to take his company private and did some head scratching over it. Generally speaking, the only point in going private is to be able to avoid the costs of regulation (which are non-trivial; for a Fortune 500 company they could easily be $20+ million a year) and/or to avoid the necessity of herding all those cats when rapid and profound changes are planned. This article outlines a third option I hadn’t considered:
Will Michael Dell become the Marlboro man of the PC age?
http://www.theregister.co.uk/2013/02/06/dell_private_like_tobacco/
There are certain industries that are considered ‘cash cows’ (meaning they produce cash like cows produce milk) where there is very little room for growth, but their margins (either through economies of scale, regulation or barriers to entry) are nice and fat (‘nice and fat’ translates to profit greater than 15% after taxes, tags, title and destination charges). In the business world companies are considered to be in one of three stages: growth, sustainment or harvest. In the growth stage you expect the stock to trade at substantial multiples of its earnings (though not, I believe, as high as 45+ unless there is some explosive growth posited for the near future), perhaps ‘infinite’ if there are no earnings (lots of dot coms (dot bombs?) did so, never to every make a dime, so you are taking a lot of risk when you do that). In the sustainment stage your multiples drop down to the 15 range as you are expected to grow a bit better than inflation and are generally expected to put most of your earnings back into the company (hence no dividends). In the harvest stage the stock price is generally flat against inflation, multiples are right around 10 (meaning you expect to get a 10% return on your stock purchase investment, i.e., right around the long-term average of the stock market) and they pay reliable dividends because the expectation is that investors can do better with that money than the company can. Harvest companies, though, are not sexy and as such tend to be ignored by investors and with a little research you can find undervalued ones (meaning that they will return more than 10%). They are, however, a really good place to put your money as long as you are careful to evaluate the length of harvest time available (some can harvest ‘forever’ while others have a very fixed horizon). Indeed, I recently read an article (didn’t seem to blog on it, though) that indicated that more volatile stocks were actually paying _less_ than their less volatile compatriots, meaning that investors were paying a substantial risk premium instead of obtaining a superior return. My point is that ‘boring’ can be beautiful if you want stable returns over the long run. Unless you get lucky (and face it, if you are making trades more often than once a decade, you are trying to time the market, hence gambling), you can’t beat a well diversified portfolio that has a selection of growth, sustainment and harvest stocks.
So, perhaps Dell is interested in riding the cash cow without being constantly nagged by stock holders to get into this or that ‘next great thing’. I doubt it, but it could be happening.
