Dance of the zombies: Why going private won’t save Dell or BlackBerry

Covering tech these days can be a lot like watching an episode of “The Walking Dead.” Zombie companies stagger around, taking bites out of panicked shareholders and about-to-be fired employees. In the cases of Dell and BlackBerry, it wasn’t an unexplained burst of interstellar radiation that’s responsible, of course — it was the iPhone and the subsequent mobile revolution that neither company grasped in time.

This week, a company that’s been a zombie for years finally admitted it. BlackBerry fired nearly half its staff and moved to go private, echoing a tactic that another victim of the mobile revolution made this month after a long fight: Dell.

[ How they got in this mess: BlackBerry’s stubborn denial of reality and Dell’s dependence on a tired PC-centric business. | For quick, smart takes on the news you’ll be talking about, check out InfoWorld TechBrief — subscribe today. ]

Sorry to say, chances are neither company will return to the land of the corporate living, though Dell has the better shot. Going private is a slick trick that makes a few people really rich and buys some time, but does little to solve the fundamental problems that turned their companies into flesh eaters.

Going private solves little

Why do companies go private? What everyone always says is that “it will get Wall Street off their backs.” There’s some truth do that.

The relentless pressure of quarterly earnings reports and conference calls with analysts foster a shortsighted fixation on short-term results. Going private removes that short-term pressure. If the company has not taken on too much debt when it buys out its shareholders, the new investors “typically have a longer-term time horizon,” says Rajeev Chand, head of research at Rutberg & Co., a boutique investment house focused on the wireless industry. In theory, that means it can undertake radical moves that exact a short-term price without suffering a beating from Wall Street.

But the longer horizon is only meaningful if the company has a reasonable market position and strategy to implement. BlackBerry probably doesn’t, says Chand. And Dell’s plan to reinvent itself as some sort of enterprise service provider seems difficult at best, especially because it took on a mountain of debt in its buyout, reducing its ability to hang on during a comeback effort.

There’s a larger point here: Going private simply doesn’t work. Leveraged buyouts, or LBOs, make some people very rich, but they historically do not improve the performance of the companies in question, according to a recent study from the McCombs School of Business at the University of Texas at Austin.

Using tax data from the IRS, the Texas profs looked at the performance of 300 large and medium-sized companies that went public between 1997 and 2005. They found “little evidence” that their performance improved after an LBO. When performance did improve, the better results were not rooted in the ownership shift. What’s more, the companies remained highly leveraged, which means they had lots of debt dragging them down.

The researchers also looked at the performance of comparable companies that stayed public. They found no significant difference between the two groups.

There was one bright spot in the study from the point of view of the bankers who profit from the LBOs: The authors did not find evidence to support the widely held notion that LBOs strip the value out of companies, the way the fictional Gordon “Greed Is Good” Gekko did in the movie “Wall Street.”

Dell: A pile of dilemmas

Dell’s problems run very deep, and getting Wall Street off management’s back won’t solve them. Founder Michael Dell’s LBO won’t break the company’s dependence on the crumbling market for PCs, and it won’t suddenly earn a return on the billions of dollars the company has poured into buying software companies. What’s more, a buyout won’t fill the black hole that is Dell’s mobile strategy.

To be fair, Dell has made some positive changes. Just a few years ago, roughly three-quarters of Dell’s revenue came from the sale of PCs. Now it’s about 50 percent, a real improvement, but still far too high. Dell has spent billions of dollars acquiring a bevy of companies in software, storage, and networking. The results, though, have been far from stellar.

When the company reported its quarterly financial results last month, it revealed that earnings slid a horrific 72 percent year over year. Sales weren’t terrible; clearly the company has been discounting like crazy in hopes or retaining market share in a rapidly shrinking market.

More positive for Dell, sales from the enterprise solutions, services, and software business climbed 9 percent to $5.8 billion, reflecting an increased focus on investing in providing services to corporations and government agencies. However, it’s easier to show a solid percentage gain when you’re starting from a relatively low number. It will take more than one good quarter in that segment to show that Michael Dell’s strategy is beginning to work.

Wall Street shares some of the blame for Dell’s problems, but that’s hardly the major factor. As to keeping the analysts off its back, that’s true. But don’t think Michael Dell’s new best friend — Silver Lake Partners, to which he owes billions — will be forever patient. He’ll still be looking over his shoulder.

BlackBerry: Lurching off a cliff

What’s the likelihood of BlackBerry saving itself by slimming down and going private? Darn small.

Chand (the Rutberg analyst) says the likely outcome is that BlackBerry will disappear in a few years. Its hardware business is “worth zero” (its new BlackBerry 10 flopped), while its service business is off by 21 percent and “is based on an archaic business model of sharing revenue with the carriers.” Its patent portfolio has some value, as does its MDM (mobile device management) platform, but neither can sustain the company. Worse, as the number of BlackBerrys in use declines, so too does the value of that MDM platform, whose key advantage is its unique ability to manage BlackBerrys. Yes, the new version can now manage iOS and Android devices, but so can dozens of other MDM tools, which nearly all businesses already have in place for their large fleet of iOS devices and growing fleet of Android devices.

Chand says it’s worth trying to become an enterprise services business that focuses on more than BlackBerry — such as through its BlackBerry Messenger service, which it launched this week for iOS and Android, then suddenly pulled, and through its BES MDM server. Or it could spin off peripheral businesses and try to survive as a niche provider of highly secure smartphones. The chances of either succeeding are less than 50-50, he tells me.

Jeffrey Pfeffer, a professor of organizational behavior at Stanford’s Graduate School of Business, says management and founders sometimes overestimate their ability to turn things around. “A lot of this is associated with hubris or pride,” Pfeffer told NPR. “You think you know better. You think you’re smarter than the world.” That’s rarely true.

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This article, “Dance of the zombies: Why going private won’t save Dell or BlackBerry,” was originally published by InfoWorld.com. Read more of Bill Snyder’s Tech’s Bottom Line blog and follow the latest technology business developments at InfoWorld.com. For the latest business technology news, follow InfoWorld.com on Twitter.