Inside ownership is a measure of the amount of stock owned by directors or senior officers of a company. Inside ownership is generally considered a positive investment criterion because it implies that the decision-makers at a company have skin in the game. Insider buying, a metric that reports recent purchases by insiders, is also a strong market signal because it could indicate that top management believes company stock is currently cheap. However, inside ownership could also pose major issues, especially when the insiders own a significant portion of the company as a result of having built it.
One look at Dell Inc. (NASDAQ:DELL) quickly shows the issues related to strong inside ownership. Michael Dell, the founder and billionaire behind Dell Inc. (NASDAQ:DELL), recently decided to take his company private. Dell stock has been stumbling for years, and the company wants to reinvent itself and move away from the personal computing business, a transition successfully executed by International Business Machines Corp. (NYSE:IBM). However, this transition will be costly, so Dell Inc. (NASDAQ:DELL) wants to take the company private so transformation can be done outside of the public eye.
The problem is the price offered by Dell Inc. (NASDAQ:DELL) represented a small premium over the stock price prior to the announcement. At $13.65, many of Dell’s largest institutional holders indicated that they would not vote in favor of the buyout. Michael Dell’s 12% ownership stake in the company immediately came into question, as many investors accused him of trying to steal the company from current shareholders. The low bid caught the attention of activist investor, Carl Icahn, who has made his own aggressive offer for the company. The future of Dell Inc. (NASDAQ:DELL) is now very uncertain, and the company has created a giant headache for itself. The fact that the buyout was led by the company’s biggest holder certainly did not help Dell Inc. (NASDAQ:DELL) win investors with a $13.65 bid.
Inside ownership by the founders of the company can also provide benefits for shareholders. World Wrestling Entertainment, Inc. (NYSE:WWE), the globally-recognized media company, shows how shareholders can profit from a family business. The McMahon family created a two-class share system that allows them to maintain control of nearly 82% of the voting stock. While this may appear concerning because investors voting rights are meaningless, it also creates a problem for the McMahon family that can serve investors well.