Why Would Microsoft Invest $3 Billion Into Dell?

Microsoft may be planning to invest between $1 billion and $3 billion into Dell as part of a leveraged buyout that would take the company private, CNBC reported Tuesday. 

The report claims that Silver Lake Partners is acting as matchmaker, negotiating an investment between Dell and a special committee representing Dell's shareholders. The Wall Street Journal confirmed CNBC's report, suggesting that any Microsoft investment could be on the order of a couple billion dollars. Microsoft and Silver Lake's relationship dates back to May 2011, the WSJ reported, as the equity group architected the $8.5 billion deal for Skype.

(See Secrecy: The Real Reason Taking Dell Private Makes Sense.)

Dell has been said to be negotiating a deal that would take the company private, valued at about $23 billion to $24 billion. Under the new ownership, Dell would be owned by founder Michael Dell as well as Evercore Partners and Silver Lake, according to Bloomberg. Mr. Dell himself owns about 15.7% of the company's shares, worth $3.45 billion at today's deflated prices.

Dell, of course, made its mark by stripping costs out of the PC supply chain and persuading customers to pay up front for a personal computer that it hadn't even built yet. Over time, however, the trend of PC commoditization it helped establish caught up with the company, and the balance of power in PC manufacturing has swung toward Asian countries with lower labor costs.

So Why Microsoft?

Microsoft, of course, is facing its own pressures, as customers shift away from Windows and to smartphones and tablets. Under this scenario, one analyst explained, Microsoft would essentially be buying a customer base. And with $5 billion in cash on hand at the end of the September quarter, Microsoft could theoretically afford it.

"Microsoft, with a $3 billion investment, would get a certain amount of control and influence over Dell," wrote Patrick Moorhead, a former corporate fellow with AMD and now principal of his own analyst firm, Moor Insights, in an email. "Dell has pulled back from the PC business as of late and that is not good for Microsoft as its cash cow is Windows. An investment of this size could guarantee a longer term Windows customer."

Dell, unfortunately, has never had much luck in either tablets or smartphones. After periodically trying and failing to launch a tablet and phone, the company has always returned to its bread-and-butter product: the PC.

It's not hard to believe that Microsoft might also be trying to pursue the sort of deal that brought Motorola under Google's fold. Ironically, Google has done everything but tap into Motorola's manufacturing; the word was that Google bought Motorola for its patent portfolio, and every Nexus device that Google announces without a Motorola logo on it gives more credence to that theory.

Today, however, Dell is more than just an expert in cost-cutting; the company has been working hard to beef up its services business. And cost-cutting is a service: in a meeting last week, Tracy Davis, vice president of Dell's data-center solutions group, explained that if customers wanted to build Open Compute servers based on the Common Slot or "Group Hug" board, they should turn to Dell - the only company with the global supply-chain expertise to search out the best deals.

Misery Loves Company

But if the PC really is on the wane, just as desktops eventually gave way to laptops and so on to tablets, then a Microsoft-Dell relationship might by trying to prop up a pair of companies facing the same underlying problems. It's a little hard to believe that a company as large as Dell would go out of business, but to that I would say two words: Creative Technology. More than a decade ago, the company's sound cards were in virtually every PC. Then sound functions became integrated into PC motherboards and processors and the company's music business was steamrolled by the Apple iPod. Today, Creative Labs, its U.S. subsidiary, sells the sort of headphones you can find in the back aisles at Target.

Microsoft hasn't commented on any particular investment, and I don't expect it to. But with the company's quarterly earnings call due Thursday, Wall Street analysts will undoubtedly broach the subject, especially if Microsoft has nothing to say before then.

Image source: Dell.com.