Don't Follow Private Equity Strategies; Invest in Strength, Not Yesterday's Heroes

Don’t Follow Private Equity Strategies; Invest in Strength, Not Yesterday’s Heroes


Recent reports have suggested that Dell (DELL) is once again flirting with various buyout firms in an attempt to go private. While a buyout deal would most likely be good for shareholders in the short-term, it is hard to understand why any private equity firm would want to touch a company that is battling to stay relevant in a struggling industry.

Many times these private equity managers see certain companies, both public and private, as bargain deals. They believe they can use their capital to buy a company and restructure it to a point where it may not be maximizing as much of a profit currently. Unfortunately strategies to get lean often involve cutting jobs and dealing a blow to employee morale. This certainly doesn’t equate to achieving the best shareholder values over time. Many times it just comes down to money burning a hole in these big investors’ pockets; they’ll invest in about anything with hopes of hitting a huge score. Sometimes this works, but plenty of times it doesn’t. Everyday retail investors should not take their cue from these private equity investing strategies. It is better to put money in intelligent investments, not bargain ones.

Bored Money is Dumb Money

Just take a cue from a recent private equity story of a public company gone private gone bankrupt. In 2007 the Tribune Company was bought out by Sam Zell and his Equity Group Investments firm for $8.2 billion. Immediately after the buyout the media conglomerate went private with Zell as Chairman and CEO. However, only a year and a half later the Tribune Company filed for Chapter 11 bankruptcy protection. It wasn’t until December 31, 2012 that the Tribune Company emerged from bankruptcy under new ownership.

Zell made his investment in a company in a struggling industry. The Tribune Company is the nation’s second largest newspaper publisher with ten daily newspapers and commuter tabloids. Though the Tribune Company had other assets other than newspaper publishing, the struggling newspaper business was and is its main focus. Zell used a great deal of debt financing to purchase Tribune and was unable to turn around the company before filing for bankruptcy. It is hard to understand why a wealthy, and presumably intelligent, man like Sam Zell would invest such a great deal into a company in a struggling sector. In only a year and a half the company had to file for bankruptcy. It just shows that sometimes these investment decisions are a bit reckless and hasty, possibly for the thrill by a bored investor.

What’s Next?

Though there is a possibly that a private equity firm will be able to turnaround Dell into a strong company once again, probably with  a different focus, it is just hard to see why high powered investors would want to touch such a struggling company. PC sales have been sluggish recently and there is not too much hope looking forward. It just seems as though investors are grasping at straws with hopes of turning Dell around. In the market’s case and traders more specifically, this isn’t about making a long-term bet, but rather, hoping a deal does happen and their move to chase the rumor can be rewarded.

More over, there has been talks between buyout firms and struggling companies like Best Buy  (BBY) and Xerox  (XRX) with hopes of going private and restructuring to lead to some sort of profit. Again, it just seems as though private investors are just looking at anything for potential scores rather than invest in companies with growth potential in the future. Sometimes bargain companies are bargains for a reason; there is not much value. However, these big time investors are sitting on a lot of capital and/or credit that they want to use to see some returns. They don’t always make the most sound investments when this potential is just staring them in the face.

The Bottom Line

Everyday investors need not pay attention to the strategies used by private equity firms and other big time investors. Though this may seem obvious, the few and far between stories of big turnaround success stories can seem glamorous and fill investors’ heads with delusions of grandeur. You should stick to smart investment strategies, with holdings in financially-growing companies. Even if you feel as though you have money burning a hole in your pocket, sometimes it is better to let it sit in cash or a low interest rate savings account than lose it on poor, bargain investments.

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