Should Microsoft buy a stake in Dell?

A deal could be a hardware-software match made in heaven

By Jan 23, 2013 9:59AM
Dollar sign on keyboard CorbisDell (DELL) is reportedly in talks for a private buyout, which would allow the struggling computer maker to craft a turnaround strategy without the pressure of pleasing shareholders every quarter. On Tuesday, CNBC reported that software giant Microsoft (MSFT) is considering joining the buyout with a $1 billion to $3 billion investment that would give it as much as a 13% stake in Dell. Both companies declined to comment on the report. (Microsoft owns and publishes Top Stocks, an MSN Money site.)

In some respects, it would make sense for Microsoft to buy a chunk of Dell. Like Hewlett-Packard (HPQ), Dell was late to the smartphone and tablet party, but the company remains the world's third-largest producer of personal computers. Furthermore, Dell has a strong business selling computers to corporate customers, an area that Apple (AAPL) and Google (GOOG) are trying to wriggle into.

If Dell were to decline further, that would be bad news for Microsoft, which is reliant on Dell and other PC makers to run its Windows 8 operating system. As David Goldman writes at CNN Money:

With Dell directly under its influence, Microsoft could pressure the PC maker to produce Windows 8 devices that more closely align with its vision. "I think Microsoft has identified this is an issue and is trying to have more say in its destiny," said Al Hilwa, an analyst at IDC. "It's clear that Microsoft wants to be more aggressive in controlling and directing the hardware ecosystem for PCs." [CNN Money]

However, Microsoft needs to sell its software to an array of hardware partners, and the company could run into problems if it's seen as being too entwined with Dell. For instance, Microsoft's "decision to manufacture its own Surface tablets last year alienated many of its long-time hardware partners," says Barb Darrow at GigaOm.

Microsoft's relationship with Nokia (NOK), which runs Microsoft's Windows Phone operating system on the Lumia smartphone, has led to similar headaches with other handset makers. "Microsoft's deal with Nokia for Windows Phone has provided a lot of benefits to the platform," says Toby Wellington at Macgasm. "However, it has also scared off almost all other hardware manufacturers due to fear of competing with Microsoft and Nokia's flagship phone."

And then there's Dell, which may not want Microsoft constantly looking over its shoulder. "The point of going private is so you can serve your own long-term goals without having to worry about short-term performance," analyst Carl Howe tells CNN Money. "Having an outside investor -- Microsoft -- muddies those waters. I think Dell would have a more certain future going it alone."

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Jan 23, 2013 11:30AM
If the rate  of return, say %6-8%, is reasonable and the risk covered then yes it would be a good use of Microsoft's cash hoard. But it's not really that significant in terms of competitive advantage since Microsoft's other ODMs like Lenovo, Nokia and Samsung all have better hardware devices and services then Dell or HP who've let the market innovation slip away while being distracted by bigger things that have failed.
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