Reply to post: Re: Meh

‘Dead weight’ Dell would destroy VMware’s value, says big investor

Michael Wojcik Silver badge

Re: Meh

Cashing in, (or rather, out) obvs.

Well, yes. That's what private-equity firms do. They exist to make a profit, after all.

That said, there is a business argument to be made. You start with a small private company, which is private because it's not big enough to go public. It grows and eventually goes public to leverage more capital, so it can grow further.

Business cycles being what they are, many public companies eventually reach a crisis point. One response is to raise private capital and take the company private again, to - as Dell said at the time - gain flexibility. When you're no longer under the thumb of quarterly reports pushing your equity and bond prices around, you can engage in some longer-term restructuring. Of course there's no guarantee this will help, and we have many examples where it didn't, but for Dell it did, at least for a while.

Then, eventually, in theory, you might get the now-private company back on a solid footing. And now you want to grow again, so you need more capital. More capital from equity would also let you pay down debt, such as that private capital from before, and remove the cost of servicing it.

So you go public again.

There are advantages to being private (less scrutiny, more internal control), and advantages to being public (cheaper capital for growth). Since it's a trade-off, it's not surprising if some businesses move back and forth between the two states.

This is particularly true in tech where equity prices are highly distorted by speculation and less tied to fundamentals. One possible interpretation is that it's good to go public if you're big and stable enough to hedge against its effects; going public is essentially a higher-risk form of investing the company's future.

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