Does a Microsoft Investment in Dell Make Sense?

Reports surfaced yesterday that Microsoft might pump up to $3 billion in Dell, a notion that until recently was unthinkable if not laughable. But times have changed.

As reported last week, Dell is purportedly lining up investors to take the company private led by private equity firms TPG Capital and Silver Lake Partners. The latter firm, the influential broker which brought the likes of Skype and Yahoo to Microsoft, seems to currently have the upper hand in leading a deal, which would include Microsoft, several sources close to negotiations told CNBC reporter Dave Farber yesterday.

Talking about the negotiations this morning, Farber said a deal could come together as early as this week but he noted it could also unfold. Given the total leveraged buyout of Dell would exceed $20 billion, according to numerous reports (though unconfirmed by either company), a $3 billion investment in Dell wouldn't give Microsoft a controlling interest in the company.

Nevertheless, the reports have indicated a Microsoft agreement to invest in Dell would come with the assumption the computer giant would make a commitment, perhaps formidable, to the Windows platform and even strengthen the distribution of Microsoft's new Surface, the company's hybrid tablet PC.

Under those circumstances, what's the downside for Microsoft, which has $66 billion in reserves, has already thrown similar amounts of cash to help Nokia market its Windows Phones and has invested $600 million in Barnes and Noble to prop its Nook tablet business? Microsoft even spent $8.5 billion on Skype, so what's a few extra billion to ensure the prosperity of perhaps the most strategic partner in the Windows ecosystem?

The downside risk for either company isn't trivial. First off, would the rumored investment itself be enough to achieve the outcome of solidifying Windows? If Microsoft's investment in Dell was to achieve the promise of giving it a competitive advantage, via early access to development or preferred licensing, it would drive a wedge between Redmond and its other strategic partners, notably Hewlett Packard and Lenovo, which are key providers of Windows-based PCs. One executive told The Wall Street Journal that a Microsoft investment in Dell indeed would embolden rivals to advance their support for Android. It could even annoy IBM. Though Big Blue no longer offers PCs, IBM does have a substantial Windows Server business and a Microsoft stake in Dell could drive IBM to further its bet on Linux, which is already significant.

But by deciding to make its own PCs last year with the release of the Surface RT and yesterday's announcement that it will release the Windows 8-based Surface Pro on Feb. 9, Microsoft has already signaled to OEMs that it'll do whatever it has to do to ensure the best prospects for its newly revamped desktop OS.  

So if Microsoft hitches its wagon closer with Dell will HP, Lenovo and others go deeper with Android? My guess is (and I don't have any inside knowledge on this), those companies have already made those decisions regardless of what Microsoft does. At the same time, if Microsoft can ensure strong demand for Windows, it should keep those partners from drastically reducing their commitment or walking away from it.

But even if all its partners were to further empower Google, Microsoft may be betting that an investment in Dell could give it what it needs to ensure it's a dominant supplier of Windows-based PCs, tablets and potentially phones, giving it the development and distribution might that has served Apple well.

Of course this influence would go beyond the device level, which isn't what's going to help Dell proper in the long run, as the company and others determined long ago. As Dell continues its push into the datacenter and cloud, Microsoft's influence could have equally untold implications. For example, Microsoft could get affordable access to technology to continue its build-out of Windows Azure, while helping it stave off, at least to some extent, the threat of alternative cloud platforms such as Amazon's EC2, OpenStack and VMware's vCloud, among others.

Some might argue Microsoft should acquire Dell outright and it could do so for much less than the $44.6 billion it almost spent to acquire Yahoo five years ago. But as its ultimate search deal with Yahoo years later showed, Microsoft can get what it needs by taking far less risk and nothing would preclude a further investment or complete buyout down the road, if it came to pass that made sense.

If anything, Dell taking on too much equity and influence from Microsoft could jeopardize the computer giant's own long-term well-being, should it be pulled away to any extent from other platforms including many popular open source initiatives. It remains to be seen whether Dell would diminish its support for other platforms but I don't think such a shift is likely -- it would cost Microsoft more than $3 billion to make that happen.

Do you think a Microsoft investment in Dell would be good for the future of the Windows platform or would the collateral damage be too significant for your comfort level? Please share your comments below or drop me a line at [email protected].

Posted by Jeffrey Schwartz on 01/23/2013 at 1:14 PM