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Microsoft's $2 Billion Dell Loan Could Yield Dividends (but No Guarantees)

If shareholders approve Silver Lake's $24.4 billion leveraged buyout bid for Dell, announced yesterday, Microsoft could reap a variety of dividends for its good will in the form of a $2 billion loan. But as far as I can tell, it's a no-strings-attached investment to offer support for a strategic partner with no assurances that Microsoft will get the return it may desire.

In a brief statement acknowledging the loan, Microsoft cryptically said: "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."

Microsoft's loan is effectively high-yield debt, according to The Wall Street Journal, which reported last night that it doesn't give Redmond any "direct role in the management or oversight of Dell." Nor does it give Microsoft "a board seat, equity ownership or formal strategic involvement." 

Interestingly, the Journal also noted neither Silver Lake, nor Dell, needed Microsoft's $2 billion loan to pull off the LBO but nevertheless accepted it to ensure good will between the two companies in wake of Microsoft's release of its Surface hybrid tablet PCs.  Back in October on the eve of the Windows 8 launch, Michael Dell and Microsoft CEO Steve Ballmer sat down with The New York Times to talk about Dell's comfort with the Surface strategy. It was a noteworthy show of faith when other OEMs reportedly were not happy with Microsoft's foray into the hardware business.

As a Dell creditor, will Microsoft's move further unnerve its other OEM partners including Hewlett-Packard, Lenovo, Acer, Asus, Samsung, Toshiba, Sony and others even more? A number of those players already are offering Android tablets, and a growing number of them are rolling out Chromebooks including HP as the latest to release one, as I noted Monday.

Having propped up underdogs including Barnes & Nobel, Yahoo and, of course, Nokia, it seems there's nothing to preclude Microsoft from aiding any of its other major PC suppliers if they were in need. The only player I can see falling into that bucket at the moment might be HP if it were to once again revisit spinning off its PC business or breaking itself up entirely. Despite a brief rumor yesterday suggesting HP was considering breaking itself up (the rumor that keeps resurfacing), there's also evidence HP also continues to see merits in keeping itself intact.

The lack of shackles notwithstanding, Dell does appear committed to Windows PCs and Windows Server-based datacenter and cloud offerings but that didn't appear to be in question even if Microsoft hadn't ponied up the $2 billion.

While the jury is still out on its Barnes & Noble and Nokia investments, Microsoft has benefitted from pumping money into Apple in the late 1990s when it bought $150 million in Apple stock to prop up the then-struggling company. Of course that wasn't altruistic, given legal disputes between the two, a looming antitrust suit by the U.S. government and another avenue to sell Office. When Microsoft later sold its Apple stock, it profited handsomely.

If indeed Microsoft's loan is the equivalent of high-yield debt, Redmond could see a nice return. While this move is not without risk, let's not forget, $2 billion is not a huge chunk of change for Microsoft. Do you think Microsoft's $2 billion loan to Dell was a good move for both players? Drop me a line at [email protected].


Posted by Jeffrey Schwartz on 02/06/2013 at 1:15 PM


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