That best interest has turned out to be a volatile and contentious concept, with multiple proposals -- one being an inside bid by founder Michael Dell, private equity firm Silver Lake Partners, and Microsoft (MSFT). But a new study raises a question of whether this will offer the company breathing room or actually further injure it.
The PC industry is being hammered by mobile devices and cloud computing. Consumers and businesses are changing their buying habits faster than companies can keep up. Last quarter, Dell's profits fell by 79 percent, even as the economy generally, if slowly, improves.
The presumption of Michael Dell and the company's board is that getting out of the public eye will give the company the flexibility it needs to correct course and get stronger. Investors may be satisfied if they can get a reasonable price for their shares.
But, according to a new study from researchers at Warwick Business School, Cardiff University, and Loughborough University in the U.K., the assumption that a private equity buyout will lead to improvement is flawed. "What we found was the promised productivity gains of a takeover rarely materialized," said Geoffrey Wood, professor of international business at Warwick Buisness School, in a press release. "Rather, there was evidence of private-equity buyouts reducing the number of workers and squeezing wages, without making the firm more efficient."
Between 1997 and 2006, 105 publicly-traded U.K. firms were bought out by private equity firms. After layoffs and sales of assets, the gap in revenue per employee between these firms and a control group actually widened. The average gap more than tripled.
The researchers said that private equity groups underestimate the importance and value of the workers they lay off. PE firms generally significantly reduce headcount because they want to free capital to pay for the debt incurred to buy the company. As Wood said:
"Why do firms that are taken over perform worse? We believe that it is because outsiders find it more difficult to cost the worth of a firm's human assets, and their combined knowledge and capabilities. Hence, they are more likely to lay off staff and less aware of the consequences this may have for future performance."
David Oreck, founder of the vacuum company that bore his name, recently blamed a private equity takeover a decade ago for the company having recently gone bankrupt. Speaking of the PE business model of incurring heavy debt to buy a business, pulling out cash, and then cutting expenses to support what they've done, Oreck said this:
"It weakens the company and I think it threatens the jobs of those who invested heavily of their own time," Oreck says. It may not be illegal, but as far as I'm concerned, it's immoral."