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

Conventional wisdom says getting Wall Street off a failing company's back will save the day, but new research proves otherwise

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."

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