Microsoft Bets $2bn On Dell’s New Deal

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Peter Judge

While Michael Dell is making a big bet, Microsoft”s loan to Dell is a canny gamble, says Peter Judge

The new deal at Dell is a gamble for Michael Dell and his backers. It’s a different sort of gamble for Microsoft.

The change at Dell itself involves a move to a world where Michael Dell should have more power, and more of a chance to shape his company the way he wants it. Dell, and the venture capitalists involved, Silver Lake have made a big and interesting gamble there. But Microsoft – which has loaned $2 billion could get itself some interesting benefits from the deal.

Dell illustration Nickolay Lamm
Ilustration credit – Nickolay Lamm,

A marriage made in Dell

Dell has been changing fast over the years since Michael Dell returned to the fold in 2007, trying to change from a PC maker to a services and software company, but it’s not as simple as that.

Dell’s strength has been in the supply chain, not in technology. The secret of its success is that, by selling PCs which are made to order, it manages to collect the money for the finished item before it pays for the components that go into it – and give users more exactly what they want. Dell used online orders to improve on this further: it was fantastically early on the Web, with an e-commerce site in 1996, when the Internet was still very exotic for most people.

Its transformation to a services firm has also about cleverly timed purchases. It has been on an acquisition spree designed to give it strength in areas where it had little to offer, including storage, networking and big services. Hence the purchase of Compellent, Force10, and Perot Systems, among very many others.

But this sort of long term strategy was never going to be easy to explain to shareholders, who base their decisions on Wall Street’s three-month cycle of quarterly results. “The financial analysts are struggling to understand the new Dell,” says analyst Clive Longbottom of Quocirca. “All they could see was a struggling PC manufacturer. Dell has been trying to get away from that model for some time, and has been moving to set its sights far more on an IBM model.”

Despite some very strong indications of success, Dell’s share price was slumping, and financial analysts hated it.

“Michael Dell convinced some venture capitalists they could make a clever investment by seeing long term value that Wall Street couldn’t.  By buying Dell back into a more private environment, Michael Dell regains strategic control and removes the 12-week horizon blinkers that being a public company applies to everyone’s eyes,” says Longbottom.

Of course, there’s a time limit on this. Silver Lake wants to see a big profit some time in the future. It wants Dell to turn around and once again go public for a big sum. If Dell doesn’t make it, then, as Longbottom says, “it will be a car boot sale of its component parts”.

What does Microsoft get?

Compared to the $24 billion value of Dell, Microsoft’s $2 billion is a small stake. It’s also important to remember this is a loan, and Microsoft does not get a stake in Dell. However, $2 billion should buy it a lot of leverage in some areas where it needs some strength.

It could also be a risky strategy though.

Firstly, what does Microsoft want? Well, it gets some very similar benefits to its Nokia partnership.

Microsoft wants help in an area where it has a struggling operating system, and little experience in making the associated hardware. When it partnered up with Nokia, it stopped short of buying the company, but persuaded it to adopt Windows Phone, an operating system which would have gone nowhere without better support on phones. It invested at least $1 billion in developing and promoting Nokia’s Windows phones.

This time round, Microsoft is having troubles getting into tablets. It has already jumped into making hardware with its Surface, with the Surface Pro arriving this weekend.

Meanwhile, users are not overly excited by Windows 8 – to the extent that formerly reliable Windows vendors such as HP are starting to hedge their bets in the laptop sphere by making serious Chromebooks running Google’s rival operating system.

Lending Dell this money could be a way to make sure Dell stays true to the faith of Windows 8. It could also give Microsoft some much needed expertise in making and shipping large volumes (at least Microsoft hopes it will be large volumes) of Windows tablets.

The risks are that other vendors may be alienated. Hardware makers other than Nokia have not given Windows Phone much prominence in their ranges, and if Microsoft ties up too closely with Dell, the same may happen with Windows tablets.

That’s one reason why it makes a lot of sense for the software company not to actually own any equity in Dell.

But the gamble looks like a good one for Microsoft.

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