Published On: Wed, Jan 23rd, 2013

Is Microsoft to lend its hand to Dell buyout?

The PC market as a whole is not a good place to be in, circa 2013 with the rise of smartphones and tablets. Sure, people still want their share of processing power, but nowadays they prefer it in smaller and snazzier packages. With desktops and laptops fast falling out of favor in the consumer market, all the major manufacturers are in a quandary. None more so than Dell, which has been one the OEMs worst hit by the downward market spiral. Dell rose to dizzying heights from its humble beginnings out of CEO Michael Dell’s college dorm room, based on their model of providing customers with high quality, customizable products at affordable prices.

Safety away from the public gaze

But now, the Round Rock, Texas based company is finding the going tough under adverse market conditions and unrelenting shareholder scrutiny on a quarterly basis. This scrutiny has made life harder for public equity firms trying to rejuvenate growth while dealing with stiff competition. Despite their position as the world’s third largest PC manufacturer, Dell is in such a position now. Tough situations call for tougher measures, and often, private ownership can provide that much needed sanctuary to make such decisions. Hence the recent buyout talks private equity firms like Silver Lake and TPG Capital.

Not a deal that comes around often

It is not often that you see a deal of this magnitude, especially since these are still early days of our recovery from the recession. This buyout could be in same league as the HP acquisition of Compaq (@ $19billion) in 2002. Despite losing almost a third of its Market Cap in 2012, Dell still commands a valuation in the neighborhood of 18-20 billion….. not surprising considering they have a cash surplus to the tune of half that amount. The share price that fell consistently for the last 11 months from a $18 high, has recently rallied slightly as news of the talks surfaced. Analysts expect the deal to factor the share value between $13-15.

Trust Microsoft to sniff out a good opportunity

This is where Dell’s longtime software partner Microsoft enters the picture. For a deal of this magnitude, the interested parties might be a bit hard-pressed to cough up all the dough. While rumors suggest that CEO Michael Dell could open up his personal kitty (estimated at $13.7 billion, and owner of 15% shares in Dell) to help push the deal through, it is Microsoft’s involvement to the tune of $2-3 billion that has piqued the interest of onlookers and analysts. This would give Microsoft a potential share of close to 13 or 14% in a privately owned Dell. Remember Facebook, anyone? The software giants are past masters in the art of leveraging minority stake in allied companies to their advantage.

A tale of two underdogs getting together

In fact it makes eminent sense for both Microsoft and Dell to be hand in glove in business. Both companies share the same predicament in a sense at the moment. They are both struggling to deal with the changing market equations. While Dell are yet to dip their hands into the tablet and smartphone market, Microsoft’s attempts to enter the party with the Windows OS has yielded no tangible inroads. Microsoft need a captive OEM to churn out devices to run their Windows Phone OS to have any hope of even making a dent in fortresses Android or Apple in the near future. And a Dell under the financial restrictions of private ownership could do with Microsoft’s large coffers to back them up for a foray into uncharted waters of tablets and phablets. Charity has nothing to do with it. It is all about business opportunity and so far, it seems to be for the benefit of all parties concerned. Google and Apple will not be unduly worried as of now, but they will surely be on their guard.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.