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The Weakness of Taking Companies Private: The Story of J.C. Penney, BlackBerry, Et Al.

Douglas A. McIntyre

The notion of taking companies private is probably as old as the one of taking them public. The first generally takes money from outside shareholders. The other seizes assets back, usually at a bargain much worse than the IPO price.

As of now, Dell Inc. (DELL) and BlackBerry Ltd. (BBRY) are at various stages of going private (maybe). Add to that list J.C. Penney Co. Inc. (JCP), and a longer time ago, Best Buy Co. Inc. (BBY). Dell and the founders of BlackBerry and Best Buy might be part of a package, which in theory makes any deal less leveraged. As if that mattered. A bad transaction is a bad transaction, even if it is aided by some amount of financial engineering.

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The most popular reason for a "take-private" transaction is that management believes the company they run is misunderstood. Actually, that is a difficult case to make when a public corporation has shares that trade in the tens of millions of shares a day, and are watched like a hawk by analysts. The case that management knows better is a case for the public stupidity of shareholders. Nevertheless, being misunderstood is an excuse management can take to their boards and shareholders.

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Dell and Best Buy have the advantages of business models that are temporarily successful, from the foundations of balance sheets, cash flow and some degree of stable revenue. Each will be ruined eventually by advances of rival technology. But neither is at the two-minute warning.

BlackBerry and J.C. Penney each sits in a desperate position, with the larger retailer worse off. A private transaction for either would mean a complete restructuring of balance sheets -- to buy time. The time bought in each case would be worthless. The rot of failure already has taken its toll.

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Michael Dell's theory about the company he founded is that, if shielded from the public, it can use all its balance sheet resources to make the business right. The flaw in that is the Dell already has made things so wrong for so many years. Shareholders would be better off rid of him. At the other end of the spectrum, the frenzy of management turmoil at J.C. Penney is like a long Greek play. The end is never in sight until it is well over.

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