Icahn Abandons Bid To Prevent Dell From Going Private

Via El Reg comes news that Carl Icahn has, after a brief battle with Michael Dell for control over the company, thrown in the towel. From the article: "Icahn said in an open letter to shareholders that he still thought that Big Mike's $13.88 per share offer for the firm undervalued it, but had decided that it would be 'almost impossible' to win the battle at the shareholder vote on Thursday. 'I realize that some stockholders will be disappointed that we do not fight on,' he wrote. 'However, over the last decade, mainly through "activism," we have enhanced stockholder value in many companies by billions of dollars. We did not accomplish this by waging battles that we thought we would lose.'"

Re:Translation

[UnHolier than ever]

Or, translation: Michael Dell tried to buy Dell for cheap, Icahn bought some shares and made noise saying it was worth more. Michael Dell ended up paying more. Icahn was right.

Re:Translation

[Cassini2]

On Wallstreet, public companies must always maximize short term profits, whereas private companies can make decisions to ensure long-term profitability. Hopefully, in a big corporation, maximizing short-term profits will also maximize long-term profits. However, that does not always occur.

A good example of the difference in strategy is the American auto industry. The public companies (GM, Ford, Chrysler) routinely underperform, and often lose money. However, lots of privately held or privately controlled companies consistently make money. Magna is a good example of this. These companies keep a lid on their costs, and do not do anything to impair the long-term profits of the company.

I was at an analysts presentation on the mistakes GM, Ford, and Chrysler made. Every single mistake involved optimizing short-term profits at the expense of long-term profits. Individually, none of these decisions would have bankrupted GM. However, after a pattern of decades of short-term optimization, GM was broke.

If Dell wants to compete with HP, they only need to accept a 0.25% less per year return on investment than Wall Street. A private investor can make that decision, because he knows that if the company is well-managed, then the investment will pay off.

Having access to cheap capital in a discipllined, well-managed company is a huge advantage. The big companies engage in endlessly complicated financial manipulations to boost short-term profits. In a private company the decision is easy: focus on outcomes that maximize the long-term success of the company.

In a well-managed private company, there is no Enron-like manipulations that destroy the long-term shareholder value. Thus, Dell can adopt a strategy where it ensures its products are competitive and sell, and then wait for HP to implode. After some of HP's recent CEOs, it is a probably a safe bet that HP will implode. That would leave Dell as the only large North American PC vendor, which would be a pretty nice place to be (for Dell).