The proposed buyout of Dell Inc. by founder Michael Dell and private equity firm Silver Lake Management LLC, Dell founder and partner, has become contentious. A shareholder vote on an offer was postponed once with a reported second postponement in the works. Activist investor Carl Icahn opposes the deal and has recruited backing from mutual fund manager T. Rowe Price. In the meantime, Michael Dell and the company’s board are feverishly pitching large investors in a bid to get their support.
Although most people who get a business degree will never face this amount of public conflict, watching the situation at Dell is an important reminder of the basic dynamics of a business. There are many people to consider when making strategic decisions. An important skill of any would-be executive is to recognize conflicts of interest and navigate them as well as possible.
One of the top responsibilities of upper management is making decisions while balancing the interests of shareholders. Nowhere does that become a potentially sharper conflict than when a public company considers a buy-out offer. When people talk of business and the interest of shareholders, they make the intrinsic mistake of assuming that all shareholders are alike.
They aren’t. Shareholders have interests that differ as much as their investment style and strategy. There was a time that Icahn was known as a corporate raider. Over the years, his style has changed and he’s developed the reputation for being an advocate of shareholder rights. There are still raider-types in the investing world that might be as likely to appear on a board as Icahn, people who might want to take on debt to buy a company and then break the company apart, selling pieces to repay the debt.
There are also pension fund institutional investors more likely to have an interest in long term prospects of a business. There is no single approach that can satisfy all the investors. And there are, ethically and morally, obligations to other classes of people. Workers, for example, helped the company achieve whatever success it has enjoyed. Communities in which a company has had an office may have invested in infrastructure to help the local presence do business.
Shareholders might do well in a deal, but is there any consideration of the company as an ongoing business, particularly if, as often happens in private equity deals, the planned level of debt may hurt its ability to compete and require heavy layoffs? Would the company, investors, and other shareholders be better off remaining independent or finding another deal that will gain a long-needed change in management?
There are never easy answers to such questions, and yet those in management must be ready to wrestle with the conflicts and try to find compromise solutions. And that is a necessary part of almost all strategic decisions, even when the fate of the company is not obviously in the balance.