Michael Dell's Lesson for Elon Musk: Going Private Isn't a Cure-All
(Bloomberg) -- Elon Musk seems to be taking a cue from Michael Dell in his desire to take Tesla Inc. private. But if Musk thinks removing his money-losing company from public markets will solve all of his problems, he hasn’t learned Dell’s lesson.
The similarities are clear: Like Dell, Musk is the founder and chief executive officer of a struggling publicly traded company. He has had to contend with a high degree of public scrutiny, analysts who are critical of his strategy, and expectant investors willing to bail out after a bad quarter. In 2013, Michael Dell also retreated from those outside forces by taking his company private in a leveraged buyout, saying that he wanted greater freedom to make the decisions needed for a turnaround amid a shrinking personal-computer market.
Now, five years later, the PC mogul has found that being private has its own limitations, and he’s currently pushing to once again list the overhauled Dell Technologies Inc. publicly.
Musk shocked investors Tuesday with a 61-character tweet that said he was considering taking Tesla private. He subsequently blasted out that his company “will be way smoother & less disruptive as a private company,” a status that would end “negative propaganda” from short-sellers, who are betting the stock will fall. Those naysayers have reason to bet against him -- the carmaker has lost money on an operating basis every year since going public and has burned through billions of dollars amid the struggle to iron out production issues with its Model 3 sedan. Tesla already has more than $10 billion in debt.
Dell’s buyout in 2013 “was potentially similar, in that it was led by its founder and CEO, Michael Dell, who had substantial equity in the company,” Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co., wrote in a note Wednesday. But Dell had enough free cash flow to service almost $18 billion in additional debt, unlike Tesla, which also has bigger capital expenditures, he added.
On Twitter, Musk referred to Dell as an example of a successful buyout. It’s true that going private enabled Dell to overhaul its product strategies, expand into new markets and gain market share. Dell also amassed a great deal of debt going private and then took on more in a drive to expand, buying EMC Corp.’s assets in 2016 for more than $60 billion to become a powerhouse in information technology. That deal might not have happened had the company faced investors skeptical of such a large merger with a struggling hardware company.
Yet over time, Dell came to the realization that servicing all of its debt, making strategic acquisitions and boosting shareholder returns was more challenging for a company that couldn’t easily tap the public markets.
Dell’s creep back to the stock market started slowly. First, it pursued a public offering for its cybersecurity unit SecureWorks Corp. in 2016. Next, it created a tracking stock in that same year to mimic its stake in software maker VMware Inc., to raise more money to help finance the EMC deal. Then, it pursued an IPO for Pivotal Software Inc. earlier this year, which allowed Pivotal to raise money to boost its growth and reduced strain from Dell’s own balance sheet.
Now, Dell Technologies is going all in, trying to convince investors to support its $21.7 billion deal to buy out the tracking stock, DVMT, and do a direct listing on the New York Stock Exchange. Dell declined to comment.
In the end, financial realities -- and aspirations -- have drawn Dell back to public markets again and again. For Tesla, with billions in existing debt and a CEO eager to build new factories, develop new models and enter the trucking industry, the question remains how it will have peak financial flexibility without access to the stock market. Tesla already has a junk-grade credit rating, so bond investors are unlikely to bail Musk out -- to pursue the buyout or thereafter. Musk owns an almost 20 percent stake in Tesla, meaning he’d still need roughly $70 billion in financing to take Tesla private. In his initial tweet on Tuesday, Musk asserted that funding had been secured, without giving any further details.
Tesla is “a long way from Dell,” Dwight Scott, the president of Blackstone Group LP’s credit arm, said Wednesday on Bloomberg Television. “It’s going to probably be some sort of strategic or sovereign wealth-type investor. It’s not a bunch of people like me on the debt side providing capital to pay off the equity. It’s very hard to lend much more money to a company that, not only is it negative cash flow, but there are still operational issues that the company is working through before it can turn positive.”
Putting aside the unanswered question of whether Musk’s “secured funding” would come from the Saudi wealth fund, which is a Tesla investor, it’s easy to see the appeal for Musk. He’s a leader who’s rebelled against the traditional constraints of being a public-company CEO -- infamously ripping analysts asking critical questions on an earnings call and using Twitter in a manner much closer to that of U.S. President Donald Trump than his fellow C-suite business leaders. There would be no more quarterly reports, no more public investors or short-sellers, no stock price to worry about.
Michael Dell extolled the virtues of being private as recently as April, even as he probably knew that time may have been coming to an end. As Dell shows Musk, sometimes you don’t want to be a public-company CEO -- but for various reasons, you have to be one.
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