Are IPOs going out of Fashion?

Last was a bad one for public markets, at least a bad week for people who believe that tech companies can find a home in the public markets.

First, the long-awaited Pure Storage IPO sank on opening, and as of this writing remains well below its IPO price.

I have not spent enough time working on Pure Storage. I say that because it is one of the more interesting companies out there, and from what I can tell, it is also highly regarded in the industry. It has grown tremendously, in a very short time, and seems to have great traction with customers.

Nonetheless, somebody did something wrong with the IPO. Losing ground on the first day is not the end of the world. Usually, it is an indication of an overpriced IPO. I have not seen the company’s financial projections, but I have to wonder what they are promising the Street. The last few tech companies to go public seem to have been smart about not guiding too aggressively, and have gotten through their first few quarters largely unscathed. Hopefully, Pure set itself up well for that. If they Under-Promised and then Over-Deliver, the current share price woes will quickly be forgotten.

I have already read several articles citing the lackluster Pure IPO as a sign that the market is losing its appetite for tech IPOs. I do not think that is true, but the other news item also has to cause CEOs to question the need to go public.

The Journal reported that Dell is in talks to acquire EMC. The merits of that deal probably deserve a separate post, but I think the mere fact that this is a possibility calls into question a lot of the assumptions we make about being public. After all, Dell is not a public company. They were taken private two years ago. The fact that a private company is in a position to buy one of the biggest public companies out there says something. One of the benefits of being public is that having a public currency in the form of stock makes acquisitions much easier. Dell merely contemplating this deal disproves that assumption to a degree.

While Dell is something of an exception – in its scale, the wealth and involvement of its founder, etc. – a Dell bid for EMC does say something about broader changes in the capital markets. If you go back and read Benedict Evans’ analysis of venture funding, he makes a crucial point. He says that companies are staying private longer, which means that many of the early stage gains in a company’s value are not being shared with public market investors. (Others have made this point before, but Benedict does the best job of proving and explaining it.) Dell buying EMC (and its stake in VMWare, a big deal) would be a further example of big potential returns being denied to public market investors.

Dell and EMC share a common trait. They are both makers of legacy products which are being hugely disrupted by shifting economics of technology hardware. They are not going to be wiped out by these changes, but they do need to make some pretty radical changes in their businesses. These kinds of changes are very hard to do as a public company. Investors hate volatility, and transitions in business models are incredibly volatile. Dell buying EMC, and presumably taking them private, means that they can make the needed changes without the scrutiny of the public markets.

But this also means that public market investors would be denied the opportunity to participate in the potential upside. I realize that we cannot have it both ways, and Michael Dell probably has a million reasons to hate dealing with public investors. But if this deal actually place, it will mark a pretty meaningful shift in the evolution of capital markets. Dell, the company and maybe the man as well, would be saying that they would rather finance acquisitions with debt and private equity, apparently from Silver Lake Partners. This is pretty far from the theory they teach in business school.

That all being said, this just may be one of those unintended consequences of the current easy money environment. Venture Capital and Private Equity funds can easily raise money now, because the world is awash in a sea of liquidity. (This is probably already starting to change.) Low interest rates and easy money let those with access to capital capture a bigger share of future returns. So private funds participate, while public markets do not. I am not trying to make a populist case here, but it is hard to escape a sense that there is something out of balance here.

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