Join the NASDAQ Community today and get free, instant access to portfolios, stock ratings, real-time alerts, and more! PC maker Dell Nasdaq: DELL kickstarted the era of affordable personal computers -- and made many people very wealthy along the way. It's hard to pinpoint precisely where Dell got off track, but it's clear that the company became an also-ran in the various technology niches in which it operated. It's a business badly in need of a fix. And Dell's board apparently realized that it's much easier to fix this business away from the scrutiny that comes with being apublic company.
It's a big deal when a company as prominent as Dell goes private, but it's hardly unheard-of. And every time it happens, there are things you can learn to become a smarter investor. Not allrevenue is created equal.
The past five years proved to be especially challenging for Dell. Without the revenue that those acquisitions brought in, Dell's sales base actually would have shrunk by a considerable amount in recent years. Meanwhile, other high-tech companies such as Google Nasdaq: GOOG , Apple Nasdaq: AMZN and Microsoft Nasdsq: MSFT managed to maintain more respectable growth rates. That's an important lesson for investors. It's not enough for a company just to increase its revenue.
The way in which the revenue increases is just as important. Strong companies get bought out, too. Fixing a broken business is one of the two main causes behind companies' decisions to exit the public markets. When a company is doing quite well, controls an attractive industry niche and would aid an even larger firm in its efforts to crack a newmarket.
That's the method GE GE deploys -- the company identifies industries that it hopes to dominate and then finds the best operators in that industry. Right now, GE is snapping up a number of great companies to help form the backbone of a new division, GE Energy.
Buyouts can be great for shareholders. Both parties start off with very different views of what a business is worth. And then they parry and thrust until a mutually satisfactory number is arrived upon. There is one hard and firm rule that these negotiators must heed. Any buyout price must be considerably above the current trading price. Otherwise, existing shareholders would wonder if a buyout gives them any benefit.
With such a built-in booster shoot, most shareholders are likely to give a thumbs-up to the transaction. Shareholders have choices when buyouts happen.
When a company receives overtures from a potentially interested buyer, the company'sboard of directors must assess the sincerity of the interest and determine what price the buyer is hoping to pay and whether the deal will be paid incash andstock. The board must then make its own assessment of the company's value, generating what is known as a "fairness opinion" which is often provided by investment banks that act as anadvisor in any transactions.
To be sure, not all corporate boards act in the independent manner that they should. Many times, the board members are close friends with top management and are inclined to simply "rubberstamp" whatever management wants. Whenever this happens, outside shareholders can raise an objection.
You'll often see amutual fund orhedge fund manager seek out alliances with other outside shareholders to force management and the board to reject a buyout offer until its value has been increased. Assuming a buyout will proceed as planned, investors can either sell their shares immediately or wait for the transaction to close. Often times, the current share price will be a bit below the buyout price, reflecting the possibility that the deal will fall through.
That's why many investors choose to hold on until shares move up to the buyout price. If you do nothing, then the cash from the sold shares is simply be deposited into your brokerage account when the deal closes -- typically three to four months later.
Unless a company is being acquired with another company's stock, in which case you receive stock of the acquiring company instead. This is a fairly rare occurrence. It's smart to be wary of buyout rumors.
Stock in a cash buyout Company. : personalfinance
Dell is not the first technology company to be acquired or go private. The entire industry is always in the midst of rapid change, with new products that can leapfrog existing products. Many investors start to focus on companies like Dell when they have stumbled badly, presuming that management will fix the business -- or sell it.
That's virtually unheard-of and a clear sign that some sort of bold move might soon take place. There's an old saying onWall Street: Never buy a company's stock in hopes of a buyout. Indeed, most rumored buyouts never even come to pass. Instead, look at the possibility of a buyout as just one of many potential positives when you are assessing a beaten-down stock.
Let's use data storage firm Fusion-io FIO as an example. This company has been repeatedly mentioned as a potential buyout target, and every time the rumor mill churns up, the stock spikes nicely higher. And then the rumors fade and those who had been hoping for a buyout are leftholding the bag. Someanalysts say this company has a very bright future, and some even suggest that a buyout will eventually happen.
Making a bet on such an outcome looks much wiser when shares are washed out, as they are now. It's the natural Darwinian evolution of publicly-traded companies.
Indeed, many of the companies that were in the original Dow Jones Industrial Average don't even exist as public companies any more.
They've long since been acquired. To reiterate, never buy a stock simply because you think it has buyout potential. But use that sentiment as part of your broader investment thesis for a stock. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc. Enter up to 25 symbols separated by commas or spaces in the text box below.
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