As investors, we love it when corporate management eats its own cooking, meaning owns lots of company stock. This shows a tangible commitment in line with other shareholders. And it can prevent a lot of foolishness from happening. However, it's not the only ingredient in the recipe for investment success. Just because management has a large stake doesn't mean mischief can't occur in the kitchen, with shareholders being served a cold meal.
For example, Dell Computer announced it will be acquired by a group of investors that includes Chairman Michael Dell. If you bought DELL recently as low as $9 per share, you are happy with the $13.65 buyout price. But if you are like most long-term DELL shareholders, you are "under water", holding stock purchased over the past decade at anywhere from $15 to $40 or so (see below). Michael Dell owns 14% of DELL, and he is opportunistically buying the company from long-suffering shareholders, in concert with a "Private Equity Group", which is another name for a group of sharks looking to clean the plates of public shareholders. And clean up they did.
DELL stock performance (2/2003-2/2013)
My guess is the long-suffering DELL shareholders (our firm does not own the stock) don't have many options to pursue. If another bidder emerges, Mike could threaten to vote his stock against the proposal, or further threaten to resign his leadership of DELL. Given the volatility of the technology business and DELL's business challenges in transitioning from a desktop/laptop world to a mobile iPad/iPhone world, management turnover is the last thing a new owner wants. So Michael Dell has current shareholders "over a barrel" with few if any good options.
To further rub salt in the wounds of long-suffering DELL shareholders, it's possible that Dell and Co. will fix the problems and "flip" the company back to the public at much higher prices in 3 to 5 years, much like a real estate investor does with a fixer-upper house.
What's the point, you might ask? The point is good management is critical to most businesses, and "eating their own cooking" by management owning a large chunk of stock is even more desirable. But nothing is perfect, and sometimes a large owner can take advantage of minority shareholders. Particularly ultracompetitive businesses such as technology that rely heavily on management expertise. Just another reason why we generally steer clear of technology, and we work very hard to make sure the cook is whipping up a dish that won't leave us as shareholders cold and hungry.
