When Dell announced Tuesday that it’s going private with a $24.4 billion buyout deal, one of the highest-profile names confirmed to be taking part in it was Microsoft, which is lending $2 billion to the buyers.
What’s in it for Microsoft?
The company isn’t saying much beyond a statement that it’s “committed to the long-term success of the entire PC ecosystem and invests heavily in a variety of ways to build that ecosystem for the future.
“We’re in an industry that is constantly evolving. As always, we will continue to look for opportunities to support partners who are committed to innovating and driving business for their devices and services built on the Microsoft platform.”
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Although Microsoft itself referred to PCs in its statement, and most people think first of personal computers when they think of Dell, the combining of the two companies’ resources will likely yield the most benefits not with PCs, but with cloud and corporations, analysts say.
“The device business is a low-margin business,” said Mikako Kitagawa, an analyst at research firm Gartner. “You have to sell a lot.”
Selling to corporations, though, has a higher margin and, like Microsoft, “Dell has a huge customer base in the enterprise [large business] market,” said Kitagawa.
It is this combination of Dell server and storage hardware with Microsoft software and services such as SQL Server and Dynamics CRM that analysts say could prove to be the most lucrative result of Microsoft’s investment in Dell.
The ability for each of those companies to continue to sell their products competitively depends on their being able to create tightly integrated hardware-software systems that are more efficient and easier to manage, said David Johnson, an analyst with research firm Forrester.
Under the terms of the deal, Dell founder Michael Dell, 47, the largest shareholder, is throwing in his 14 percent stake and an undisclosed sliver of his $16 billion fortune to help finance the sale to a group led by the investment firm Silver Lake.
In addition to the $2 billion loan from Microsoft, the remaining money is being borrowed through loans arranged by several banks, saddling Dell with an estimated $15 billion in debt.
Dell stockholders will be paid $13.65 per share, 25 percent more than the stock’s price of $10.88 before word of the buyout talks trickled out three weeks ago. But it’s a steep markdown from $24 six years ago, when Michael Dell returned for a second go-round as CEO.
Dell shares rose 15 cents to close at $13.42 Tuesday.
The deal would be the largest leveraged buyout of any type since November 2007, when Alltel sold for $25 billion to TPG Capital and a Goldman Sachs subsidiary.
Dell’s decision to go private reflects the tough times facing the PC industry as more technology spending flows toward smartphones and tablet computers. PC sales fell 3.5 percent last year, according to Gartner. And Web tablets are expected to outsell laptops this year.
Michael Dell is betting his company will be able to evolve into a more diversified seller of technology services and products aimed at businesses without having to pander to the stock market’s fixation on whether earnings are growing from one quarter to the next.
Dell expects to complete the sale by the end of July. Once the deal closes, Dell’s stock will stop trading on the Nasdaq Stock Market 25 years after the Round Rock, Texas, company raised $30 million in an initial public offering.
Analysts said Microsoft most likely structured its contribution to the deal as a loan, rather than an outright equity stake, to avoid alienating partners who produce the PCs and other hardware running Microsoft’s operating systems.
When Microsoft decides to invest in one particular manufacturer, “it sends a signal to other partners — that Microsoft is going to be closer to one OEM [original equipment manufacturer] than others,” said Crawford Del Prete, an analyst with research firm IDC. “I’m confident in saying that’s why Microsoft made it a loan, not an equity investment. It doesn’t want to send the signal of having a favorite.”
Obviously, part of Microsoft’s interest in funding the deal is that it “has a huge vested interest in making sure that PC manufacturers — particularly those with a strong PC share — are healthy” at a time when the PC market is in big transition, Del Prete said.
Part of that is looking toward the opportunities not just in personal computing but also in data centers and computing infrastructure.
“Server and Tools [the division at Microsoft in charge of providing server, database, virtualization and cloud services] is equally as interested in [the Dell deal] as is the Windows division,” Del Prete said.
Working more closely with a hardware manufacturer like Dell could yield benefits for Microsoft both on the personal computing front and the cloud and corporations front.
It would give Microsoft more supply-chain expertise and the ability to more tightly integrate hardware and software, and also provide a channel for sales within corporations of hardware running Microsoft systems and services, said Johnson, the Forrester analyst.
The risks for Microsoft, Johnson said, include how its other manufacturing partners react and if Dell can’t turn the corner fast enough.
“Dell will have to focus fast on where its value is and on what it can do really well,” he said.
Microsoft shares closed Tuesday at $27.50, up 6 cents.
Material from The Associated Press is included in this report. Janet I. Tu: 206-464-2272 or firstname.lastname@example.org. On Twitter @janettu.