investment | Paul Wallbank - Communications Professional

Why Australia needs foreign ownership

Foreign investment is making up for the lack of Australian interest in local assets.

Such are the vagaries of radio that I’ve been asked to comment on ABC Radio South Australia about foreign ownership based on an article that was picked up by The Drum 14 months ago.

That article was written shortly after Dick Smith came out grumbling about the prospect of Woolworths selling the electronics store chain named after him to foreign interests.

My point at the time was that foreign owners would be preferable to some poorly managed, undercapitalised local buyer as the Australian retail industry – even in a declining market like consumer electronics – needs more innovation and original thinking.

As it turned out, Dick Smith Electronics was sold to Anchorage Capital, a private equity turn around fund with an interesting portfolio of businesses.

In the meantime, the argument about foreign ownership of property and businesses, particularly farms, has ratcheted up as opportunistic politicians and the shock jock peanut gallery that sets much of Australia’s media agenda have found a cheap, jingoistic issue to score points from.

So why is foreign ownership of businesses like farms, mines and factories important for Australia?

A fair price for hard work

The main reason for supporting foreign buyers for Aussie businesses is it gives entrepreneurs a chance to get a fair price for their hard work.

A farmer or factory owner who builds their business shouldn’t have to accept a lower price because Australians don’t want to pay for the asset.

It’s not a matter of being able to pay Australians as have plenty of money to invest – a trillion dollars in superannuation funds and three billion dollars claimed for negative losses in 2009-10 show there’s plenty of money around – it’s just that Aussies don’t want to invest in farming, mining or other productive sectors.

We’re already seeing this play out in the small business sector as baby boomer proprietors find they aren’t going to sell their ventures for what they need to fund their retirement.

Access to capital

Should the protectionists get their way then the businesses and farms will eventually be sold to undercapitalised Australian investors at knock down prices.

This is the worse possible thing that could happen as not only do the entrepreneurs miss out, but also the factories and farms decline as they are starved of capital investment.

Cubby Station

A good example of both the lack of capital affecting investment and finding a fair price for ventures is Queensland’s Cubby Station.

While I personally think Cubby Station is an example of the economic bastardry and environmental vandalism that are the hallmarks of the droolingly incompetent National Party and its corrupt cronies, the venture itself is a good example of why the agriculture sector needs foreign investment.

Having been converted from cattle to cotton in the 1970s, Cubbie grew as successive owners acquired water licenses from surrounding properties.

Eventually the company collapsed under the weight of its debts in 2009 and the property was allowed to run down by the administrators until it was bought by Chinese backed interests at the beginning of 2013.

At the time of the acquisition, the company’s former chairman told The Australian, “on reflection, I would go into those things with an even stronger balance sheet — in other words, with less gearing.”

In other words, the company was under-capitalised.

Competition concerns

Another reason for encouraging foreign ownership is that Australia has become the Noah’s Ark of business with duopolies dominating most key sectors.

Bringing in foreign owners at least offers the prospect of having alternatives to the comfortable two horse races that dominate most industries.

The property market

An aspect that has excited the peanut shock jocks has been the prospect of Chinese buyers purchasing all the country’s property.

For those of us with memories longer than goldfish, today’s Chinese mania is almost identical to the Japanese buying frenzy of the late 1980s.

Much of what we read about the Chinese buying homes is self serving tosh from property developers and real estate agents and what mania there is will peter out in a similar way to how the Japanese slowly withdrew.

This isn’t to say there shouldn’t be concerns about foreign ownership – tax avoidance, loss of sovereignty and Australia’s small domestic market are all valid questions that should be raised about overseas buyers, but overall much of the hysteria about foreign ownership is misplaced.

What Australians should be asking is why the locals aren’t investing in productive industries or buying mining and farming assets.

The answer almost certainly is that we’d rather stick with the ‘safety’ of the ASX 200 or the residential property market.

We’ve made our choices and we shouldn’t complain when Johnny Foreigner sees opportunities that beyond negative geared investment units or an tax advantaged superannuation fund.

Australia’s economic Hari-Kari

As the cheap credit era comes to an end, the Australian economy acts as if the party is never going to end.

“The Golden Era of Credit is Now Over” writes Maximillian Walsh in the Australian Financial Review today.

Max’s story relies mainly on the April edition of Bill Goss’ monthly newsletter where the founder of investment firm PIMCO writes about the talents of today’s market wizards;

All of us, even the old guys like Buffett, Soros, Fuss, yeah – me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience.

The credit boom of the last fifty years created many winners – investment bankers, property owners and those who sell things funded by easy finance.

One of the best examples of a fortune made through easy credit is Australia’s Gerry Harvey. Here’s one of Gerry’s ads from 1979.

Hurry into Norman Ross. You can use Bankcard or our easy credit system. You can even use cash!

Three years later Gerry was sacked from the business he founded and he set up Harvey Norman, promising John Walton and Alan Bond “I’m going to beat you.” By the end of the 1980s he had.

Gerry’s success is built on easy credit and the rise of the consumerist economy. From the hire purchase plans of the 1960s, the introduction of credit cards in the 1970s and the banking deregulations of the 1980s, Gerry was able to sell goods to eager consumers who could worry about paying later.

In the 1990s and 2000s a happy coincidence of easy credit and cheap Asian manufacturing – note the prices of electrical goods in that 1979 commercial – saw businesses like Harvey Norman grow exponentially.

Mao promised the Chinese a chicken in every pot, Gerry delivered a plasma TV in every Australian bedroom.

Today, as Bill Goss says, the credit party is over. Last drinks were called with the failure of Lehman Brothers on September 16th, 2008.

However this hasn’t stopped the Aussie economy, as the Sydney Morning Herald reports today Sales growth cheers Gerry Harvey.

In the same edition the SMH reports the government science organisation, the CSIRO, is cutting hundreds of staff. Notable in that article is a comment from the organisation’s CEO;

Dr Clark said more than 2000 companies collaborated with CSIRO but that industries were reducing the amount spent on research.

So at a time when the Australian economy is struggling with the effects of a high currency and exhibiting all the symptoms of the Dutch Disease, consumers are spending more on TVs and sofas while business cuts investment in research and development.

Karl Marx famously predicted that the last capitalist will be hanged with the rope they sold, Australians have a bunch of Harvey Norman branded credit cards for their financial seppuku.

Should Amazon focus on shareholder returns?

Is Jeff Bezos the digital Nelson Bunker Hunt as Amazon continues to gain value while not making any money?

“Shareholder returns” has the been the mantra for the modern manager – particularly when justifying fat salaries and bonuses.

Amazon though is very different – despite the company’s massive market position it doesn’t make profits, founder Jeff Bezos claims he prefers to focus on customer needs.

On a fundamental level Bezos is right – the business that delivers what customers want will succeed. The market doesn’t give a fig about shareholders’ returns or management’s KPIs.

Although making a profit is helpful.

That Amazon is spectacularly unprofitable should worry shareholders, it’s fair enough for a startup in its early days to incur losses but Bezos’ baby is nearly 20 years old and it still isn’t capable of walking on its own.

Yet this doesn’t deter shareholders. Comparing Amazon’s stock price against Apple’s and Microsoft’s is instructive.

Microsoft currently trades at a Price/Earnings ratio of 15.8 while Apple’s is 9.7 – Amazon trades at an infinite P/E.

A school of thought is that Amazon will reap monopoly profits once it conquers the world’s online retail and owns a big chunk of the cloud computing market.

However these are big markets and its unlikely any one company can ever dominate them. Indeed Amazon has failed to do so for nearly two decades despite undercutting most competitors and buying out nimble new rivals.

It’s tempting to think of Jeff Bezos being a modern day Nelson Bunker Hunt.

Bunker Hunt and his brother William spent most of the 1970s trying to corner the global silver market. At the peak of their attempt, silver prices went from $11 an ounce in September 1979 to $50 an ounce in January 1980 only to crash back down to $11 by Easter 1980.

The brothers were bankrupt by the end of the 1980s.

It’s doubtful whether Amazon’s shareholders want to follow that example, so it’s going to be interesting to see how long Jeff Bezos can continue to see the story of putting customers before owners.

Image by By The Cuba Company, New Jersey [Public domain], via Wikimedia Commons

Penny wise and pound foolish

Saving money on technology is often a bad investment as the V8 Supercars found

“We were penny wise and pound foolish” says Peter Trimble, Finance and Systems director of the V8 Supercars, about the IT setup he found when he started with the motor sport organisation 18 months ago.

The V8 Supercars were like many businesses who had outgrown their basic IT setup and were struggling as a result.

A touring organisation – “a travelling circus” as described by CEO David Malone – with 15 races in Australia, New Zealand the US has some fairly unique challenges as contractors, teams and a dispersed workforce put demands on the businesses which a basic small business system struggles to cope with.

What Trimble found at the business were employees struggling with cheap internet connections and antiquated, inadequate servers.

Focusing on the pennies and missing the bigger picture is a common problem when managements skimp on technology which leaves their staff spending more time on IT problems than getting their jobs done.

Basically the $80 a month home internet connection doesn’t cut it when you have more than two or three workers and the server that worked fine when those people were in the same office becomes a security risk when a dozen a people are trying to login over the Internet.

It wasn’t surprising the V8 Supercars management decided to go with a cloud computing service – in this case Microsoft Office 365 – and invest in proper, reliable internet connections.

What the Supercars found that being penny proud and pound foolish with IT doesn’t work for a business, office tech is an essential investment.

Paul travelled to the V8 Supercars in Launceston courtesy of Microsoft Australia.

Corporate palaces and the new Ceasars

An opulent corporate headquarters is often the indicator that management’s mind is on things other than customer service or shareholder’s return.

One of the key traits of managerialism is executives spending vast quantities of shareholders’ money on opulent corporate headquarters, is Apple the latest company to succumb to this disease?

Building a new headquarters is fun for managers. One company I worked for in the early 1990s was debilitated for months as executives spent most of their time moving walls, rearranging desk positions and changing lift designs to reflect their status as grand visionaries.

For the company gripped with delusions of management grandeur a flashy head office is the must have accessory. It’s the corporate equivalent of the Skyscraper Index and is almost as good a predictor that a change in fortunes is imminent.

Apple’s new headquarters is nothing if not impressive. Bloomberg Newsweek reports the building which, at two thirds the size of the Pentagon, will house 12,000 employees is currently estimated at costing five billion dollars, sixty percent over the original budget.

The plans call for unprecedented 40-foot, floor-to-ceiling panes of concave glass from Germany. Before the Cupertino council, Jobs noted, “there isn’t a straight piece of glass on the whole building?…?and as you know if you build things, this isn’t the cheapest way to build them.”

With over a $120 billion in cash, Apple can certainly afford to spend five or ten billion on new digs despite the grumbling of shareholders who have had to settle for a stingy 2.4% dividend from their shares.

The big question though for Apple shareholders though is whether a project like this indicates a company that has peaked with management more intent on building monuments to itself or its genuinely visionary founder rather than deliver returns to owners or products to customers.

On the latter point, there’s no evidence of Apple losing their way with their products yet, but it’s something worth watching in case management becomes distracted with their building project.

For the company I worked for, the distracted managers all vanished one day when the main shareholder of the Thai-Singaporean joint venture discovered they’d been fiddling the books. They probably needed to pay for the office fit out.

Are Australians too risk adverse for startups?

Does a culture of property speculation hinder new businesses and startups?

Last week I had coffee with Clive Mayhew who chairs the board of Sky Software, a Geelong based student management cloud service.

Clive covered a lot of interesting aspects about Sky’s business; including the opportunities for regional startups, government support and his experiences in Silicon Valley during the dot com boom. All of which I’ll write up in more detail soon.

One notable point Clive raised was how he struggles to get Australian staff to take equity in the business – people want cash, not shares.

The question Clive raises is why and that question is worth exploring in more depth.

My feeling is that it’s a cultural thing related to property – four generations of Australians have been bought up believing housing is the safest way and surest way to build wealth.

As a consequence young Australians are steered into getting a ‘safe’ job and plunging as much money into accumulating property equity as early as possible. Just as mum and granddad did.

Even those who don’t want to play the property game are affected as property speculation pushes up prices and rents; the landlord or bank won’t accept startup stock to pay the bills so employees need cold, hard cash to keep a roof over their heads.

The other angle is tax and social security policies, through the 1970s and 80s various business figures used share option schemes to minimise their taxes and successive Australian governments have passed laws making it harder for businesses to offer these incentives.

Interestingly this not only affects the Silicon Valley tech startup business model but also hurts the aspirations of Australia’s political classes to establish the country, or at least Sydney, as a global financial centre.

Putting aside the fantasies of Australia’s suburban apparatchiks – which if successful would see the country being more like Iceland or Cyprus than Wall Street or the City Of London – it’s clear that the existing government and community attitudes toward risk are reducing the diversity of the nation’s economy.

That the bulk of the nation’s mining and agricultural investment, let along startup funds, comes from offshore despite the trillion dollars in compulsory domestic superannuation savings is a stark example of risk aversion at all levels of Aussie society, government and business.

For those Australian entrepreneurs prepared to take risks, the risk adverse nature of most people becomes an opportunity as it means there’s local markets which aren’t being filled.

The problem for those local entrepreneurs is accessing capital and that remains the biggest barrier for all small Australian businesses.

How this works out in the next few decades will be interesting, it’s hard not to think though that Australians are going to have to be weaned off their property addiction – whether this takes a harsh recession, retired baby boomers selling down their holdings or government action remains to be seen.

In the meantime, don’t base your business plan on staff taking equity as part of their employment package.

Social media’s irrational exuberance comes to an end

With the tech industry’s irrational exuberance ending, the focus is now on building good businesses rather than worrying about hype, spin and fools with more money than sense.

Last week saw the annual Y Combinator demo day where the startups funded by the incubator get to strut their stuff and it appears the age of social media hype is over.

In the Wall Street Journal’s Digits blog, Amir Efrati reports Social is Out, Revenue is In as the companies showed off their income streams rather than the number of users which has been the measure for free social media apps.

That social media is out shouldn’t be surprising as the services have been tracking a standard Gartner Hype Cycle with a boom in services, coverage and investments that’s now turning into the inevitable bust and a fall into the trough of disillusionment.

Coupled with that fall for social media services are the disappointing stockmarket floats of Facebook and Groupon which have cruelled the enthusiasm for investing in tech startups with lots of user but not much revenue.

Last week’s headlines featuring Yahoo!’s purchase of Summly for $30 million and Amazon’s acquisition of Goodreads for an estimated $150 million show how the days of greater fools writing billion dollar cheques is over as more sensible valuations take hold.

Amazon’s purchase of Goodreads is more interesting than Yahoo! buying a teenage wunderkind’s venture in that Amazon is cementing its position at the centre of the global book publishing industry.

Goodreads has been one of the quiet social media success of recent years having built its subscriber base to over 16 million members sharing book reviews and reading lists.

The book review site is a natural fit for Amazon although the head of the US Authors’ Guild rightly worries the company is becoming a monopoly.

Of course the obvious retort to this is that someone else could have bought the site and Forrester’s James McQuivey speculates on why an established publisher didn’t do so much earlier.

This year’s Y Combinator Demo Day and the acquisitions of Goodreads and Summly show the era of irrational tech exuberance is over.

For good businesses operators and investors this is not a bad thing as everyone can now focus on building good businesses rather than worrying about hype, spin and fools with more money than sense.

Photo of Ashton Kutcher speaking at Y Combinator by Robert Scoble through Wikimedia commons

Privileges and princelings

Many companies have developed a culture of executive privilege in an era of easy money.

A strange thing about Australian business reporting is that its often full of gossip and name dropping as any third rate scandal magazine.

In a perverse way, treating business executives like the Kardashians gives the average mug punter – and shareholders – a glimpse into how these companies do business. Like this story in the Australian Financial Review;

Hamish Tyrwhitt was unaware of the latest drama unfolding within the Leighton board as he relaxed in the Qantas First Class Lounge in Sydney on Friday morning.

Indeed, the contractor’s chief executive officer was busy chatting to former Wallabies captain John Eales while waiting to board a flight to Hong Kong where he was due to close a recent deal to build the Wynn Cotai hotel resort in Macau and enjoy the Sevens rugby tournament.

The timing was not good. Tyrwhitt had only just boarded the flight when the news broke that chairman Stephen Johns and two directors had resigned. Tyrwhitt was forced to change his plans and is expected back in Sydney for a board meeting convened this weekend.

Nice work if you can get it.

A few pages further in the day’s AFR is another gem;

One July evening about four years ago, off the south coast of France between Cannes and St Tropez, two men sat in the jacuzzi on the top deck of a 116-foot Azimut motor yacht. It was about 3am and the sea was rough. The spa water was sloshing about and had given the latest round of caprioskas a distinctly bitter taste.

Dodo boss Larry Kestelman was telling his good friend, M2 Telecommunications founder Vaughan Bowen, about the challenges of growing his internet service provider business.

It’s tough doing business when the spa waters are choppy. One expects better from a seven million dollar boat.

That second article raises another point that’s often overlooked, or unmentioned, when reporting Australian business matters.

on Thursday the 14th, something unexpected happened. At 12.30pm, after no activity all morning, shares in the thinly traded Eftel started to rise sharply. By the time the market closed at 4pm, Eftel had soared 44 per cent to 39.5¢. Someone with knowledge of the deal was insider trading.

Insider trading? On the Australian Security Exchange? Somebody had better call those super-efficient regulators who were responsible for Australia cruising through the global economic crisis of 2008.

Somebody obviously wanted their own 116ft luxury yacht or corporate box at the Hong Kong Sevens.

Both of these stories illustrate the hubris and privileges of corporate Australia and its regulators.

One wonders how well equipped these organisations are for an economic reversal when their leaders are more worried about caprioskas and their spots in the first class lounge.

We may yet find out.

First class airline seat images courtesy of Pyonko on Flickr and Wikimedia.

You call that a graph?

A good chart can help tell a story, all too often though graphs are designed to mislead.

One way to illustrate a story is with charts. All too often though misleading graphs are used to make an incorrect point.

A Verge story on Groupon shows how to get graphs right – clear, simple and tells the story of how the group buying service’s valuation soared and then plunged while it has never really been profitable.

The vertical axis is the key to getting a graph right, cutting off most of the y-axis’ range is an easy way to mislead people with graphs. In this case you can see just the extent of Groupon’s valuation, profit and loss over the company’s short but troubled history.

Since its inception, The Verge has been showing other sites how to tell stories online, their Scamworld story exposing the world of affiliate internet marketing sets the bar.

Using graphs well is another area where The Verge is showing the rest of the media – including newspapers – how to do things well.

For Groupon, things don’t look so good. As The Verge story points out, the company’s income largely tracked its workforce which grew from 126 at the start of 2010 to over 5,000 by April of 2011. Which illustrates how the business was tied into sales teams generating turnover.

The spectacular growth of Groupon and other copycat businesses couldn’t last and hasn’t. The challenge for Groupon’s managers is to now build a sustainable business.

For investors, those graphs of Groupon’s growth were a compelling story. Which is another reason why we all need to take care with what we think the charts tell us.

Graph image courtesy of Striker_72 on SXC.HU

Australia welcomes the multi generational mortgage

Australia starts to repeat Japan’s experience with multi generational mortgages. With a twist that might be more debilitating than the Japanese lost decades.

At the height of the Japanese property boom in the 1980s, the hundred year mortgage came into being.

Pushing payments onto children and grand-children was the only way home prices could continue to rise once they hit levels which the average Japanese worker could ever afford with a more traditional twenty or thirty year mortgage.

Twenty five years later Australia finds itself in a similar position as parents guarantee their childrens’ mortgages.

Repeating the Japanese mistake

While the Japanese looked to sticking their mortgages onto their kids and grandkids, Down Under the kids are fighting back and getting mum and dad to underwrite their unaffordable loans.

This weekend’s Sydney Morning Herald features in its property section the story of how Sharon and Graeme Bruce guaranteed their son’s and his fiance’s mortgage in Sydney’s inner suburbs.

While the story isn’t clear on the size of the deposit (which isn’t surprising given the SMH’s shoddy editing), it appears the Bruces’ have guaranteed around $300,000 so his son and future daughter-in-law can grab a five bedroom, 1.45 million dollar mansion.

One wonders what great businesses Matt and Hannah could build if mum and dad were prepared to stump up a similar amount to invest in a start up?

Australia’s property obsession

Sadly we’ll never know – in Australia, the smart money gets a job, pays off a mortgage and accumulates wealth through investment properties. What cows are to African tribesmen, negatively geared units are to the Australian middle class.

The hundred year strategy hasn’t worked too well for Japan, with a declining population those mortgages entered into a boom level 1980s values now don’t look so attractive and are one large reason for the nation’s lost decades.

In Australia, things aren’t likely to work so well either. The Baby Boomers and Lucky Generationals – those born from 1930 to 1945 – guaranteeing their kids’ and grandkids’ mortgages are relying on ever increasing property prices.

This is understandable given that few of them have any experience of long term stagnation, let alone decline, of property values but it leaves them incredibly exposed should the Aussie housing market slump.

Can an Aussie property decline happen?

Many Australians, particularly those with vested interests, maintain such a decline can’t happen but the prospects aren’t good as the SMH story shows;

The couple had attempted to buy a small terrace in Newtown but kept getting pipped at the post by other young professional couples. At a higher price point they had no competition.

Despite his parents’ generosity he said he would still need to rent out a few of the rooms to help pay for the mortgage.

So Matt can’t afford the mortgage. That’s not good starting point and one that could cost his parents dearly, which they don’t seem to care about much.

”Obviously my dad guaranteeing the loan was the only way we were going to purchase this,” Mr Bruce said. ”You need to have a 20 per cent deposit otherwise the banks want you to pay insurance … it’s a bit of a rort really.”

It’s fair to call mortgage insurance a rort – as it certainly is – but its purpose is to protect the banks should a mortgagee default and the financiers find themselves out of pocket.

With Matt’s parents getting him out of paying that insurance his bank has much better default protection, equity in his parents’ property.

Guaranteeing risk and misery

I’m not privy to the finances of Sharon and Bruce, but most of their contemporaries can ill afford to lose several hundred thousand dollars in home equity in their later years.

That is where Australia’s multi-generational mortgages could turn very nasty, very quickly as older Australians find themselves having to deliver on the guarantees they gave on behalf of their over committed offspring.

In Japan, it’s taken a long time for the population to realise their national wealth has been squandered on twenty years of propping up unsustainable property prices and economic policies.

One wonders how long it will takes Australians to realise the same has happened to them and what the political reaction will be.

Will going private save Dell?

Can Dell going private reverse the personal computer manufacturer’s decline?

Now Michael Dell and a team of private equity investors are going ahead with taking the company he founded private, the question is will this make any difference to the technology company.

Turning around Dell is going to be a massive task as the company has lost the advantages that made it the world’s biggest PC manufacturer. At the same time, the industry itself is shrinking as corporate and consumer customers move from personal computers and servers to tablets and cloud services.

The triumph of logistics

Dell’s real success lay in logistics. In the early 1990s the company – along with its competitor Gateway – developed a global just-in-time assembly network which took advantage of cheap Asian suppliers, efficient air courier networks and call centres.

Bringing these together meant Dell and Gateway could deliver a custom made computer to a customer in just over a week without the hassle of holding warehouses of stock, employing sales staff or renting stores.

Price was the ultimate advantage and these companies could undercut competitors with their efficient networks, lack of inventory and no retail overheads.

Losing an advantage

Unfortunately for Dell, competitors caught up and by the early 2000s most PC manufacturers were using similar manufacturing methods and were able to match their price points.

By 2006, HP overtook Dell as the world’s biggest PC manufacturer.

Worse yet, Apple adapted Dell’s logistic systems to corner the high end of the PC market and then expand into consumer devices.

Dell’s reaction was to compete solely on price and to do so they cut component costs and outsourced support to lowest cost providers.

This backfired horribly and the poor quality products coupled with execrable after sales support deeply damaged Dell’s brand with the Dell Hell debacle being the public face of widespread customer unhappiness.

Dell in the post PC world

Making matters worse for Dell is that the market has shifted away from personal computers.

Dell has a tragic track record of diversifying out of the PC markets, all of its attempts to move into consumer electronics with PDAs, smartphones, tablet computers and entertainment devices have been, at best, embarrassing.

Enterprise computing has been more successful but even here Dell has shown little innovation and most of their entries into the corporate markets has been through acquiring specialist companies rather than doing anything different.

Part of this to failure to diversify has been because of Dell’s relationship with Microsoft. The various versions of Windows intended to be used on PDAs and tablet computers turned out to be wholly unsatisfactory and left the market open to Apple with the iPhone and iPad.

Going private

That Microsoft is going to have a financial interest in the privatised Dell is not encouraging for the company’s prospects.

Neither is the continued presence of Michael Dell. His return as the company’s CEO in 2007 has not solved the company’s problems.

It’s difficult to see where the problem was being a public company, Dell’s woes were not because of troublesome board members or activist shareholders.

Going private might allow Michael Dell and his team to experiment without the accountability of quarterly reporting, but that barely seems worth 26 billion dollars.

Dell could surprise us all by reinventing its business and claiming a role in the post-PC world, but right now its hard to see how.

Silicon Valley and the virtues of going private

Is the technology industry swinging back to investing in private businesses with solid cash flows?

Last week there were a pair of interesting stories about the tech industry’s investment models.

The biggest story was the rumours that PC manufacturer Dell may go back to being a private company and the other was Survey Monkey’s raising of $800 million through debt and private capital.

Not your usual VC play

Polling company Survey Monkey’s capital raising is notable because it’s very different to the standard VC equity models used by Silicon Valley companies of this size.

Adding to the unusual nature of Survey Monkey’s behaviour is the declaration that they have no intention of becoming a public company. By ruling out an obvious way for investors to cash out of the business, they are making a clear statement that those putting money into the venture are doing so for the long term.

That Survey Monkey is also taking on debt indicates management believe they are going to have the cash flow to service payments. Not playing to the Greater Fool business model makes the online polling company very different to most of its contemporaries in Silicon Valley.

Dell going private

Survey Monkey’s $800 million is dwarfed by Dell’s market cap of 22 billion dollars so the talk of the PC manufacturer buying out its stock market shareholders and becoming a private company is big news indeed.

The New York Times Dealbook has a close look at the of the idea of taking Dell private and comes to the conclusion it’s not likely to happen.

While there are challenges, there is merit to the idea. Richard Branson delisted Virgin from the London Stock Market in 1988 after becoming frustrated with the short term objectives of his shareholders and there’s a possibility of Michael Dell may feel the same way.

For Dell, the challenge lies in moving away from the commodity PC sector. The Dell Hell debacle showed the company’s management has struggled with the realities of the low margin computer market and things aren’t getting better.

Dell themselves are steadily moving away from PCs with bigger investments in services and other computer hardware sectors.

Project Ophelia, a USB stick sized computer running Google’s Android operating system was one of Dell’s announcements at the Consumer Electronics Show and could mark where the company is going in the post-PC environment.

Given portable and desktop PCs represent over half of Dell’s income moving away from those markets is going to be a major change in direction for the company.

A change is though what the company needs with revenues down 11% on last year which saw profits nearly halved.

Whether going private or staying public will allow Dell to recover its profitability remains to been seen, but management could probably do without the distraction of answering to stock markets while dealing with a complex, challenging task.

Both Dell and Survey Monkey are showing that there isn’t one path to raising funds for technology companies, in fact there’s plenty of businesses raising money privately without the razzamatazz of high profile venture capital investments.

It may well be though that we’re seeing private companies coming back into fashion as individual investors see the advantages in businesses with good cash flows rather then the hyped loss leaders which have dominated Silicon Valley’s headlines.

Image of Wall Street courtesy of Linder6580 on SXC.HU