The rumours of an impending deal to take Dell private have finally come to fruition, with a $24.4BN buyout deal. This isn’t surprising. Besides the particular challenges Dell faces, ones that are easier to deal with as a private company with longer horizons than placating Wall Street this quarter, the general climate for public companies has become challenging over the last decade. Sarbanes-Oxley, state-level regulation, and a surfeit of lawsuits – companies now get sued for not a drop in share price, adding insult to injury – often make it simply worth being a private company.
The interesting twist in the deal is the $2BN Microsoft debt investment. Notice, I did call it an “investment,” rather than a “loan.” Sure, it is structured as debt, and technically that is a loan, not an investment, which implies equity. And Bloomberg (and others) reports that Microsoft opted for the debt in order to be able to make the investment without unduly rankling its many other hardware partners – Acer, ASUS, HP, to name a few. But anyone who has ever owed money, as an individual or as a business, knows that creditors have at least as much leverage over the business, and usually much more, than the equityholders. Even unsecured creditors have priority over shareholders.
The official line is that Microsoft is investing to support “the PC ecosystem.” I have no doubt that this is true, in and of itself. And for Microsoft, with $6BN in cash and $62BN in cash equivalents as of Dec 31st, the cash is a blip, hardly noticed. It doesn’t need the potential equity upside; it believes its own upside is much greater.
The WSJ believes that Microsoft is attempting to wedge deeper into corporate markets, where, by and large, HP’s former Compaq division and Dell dominate. Microsoft may believe this, although I doubt it is true. Companies look at what operating system they want to run – Linux variant or Microsoft – and then buy hardware to match it. In most cases, the same Dell server will work with either option. Using Dell to drive Microsoft software will have zero impact on the corporate market. Either customers will continue to buy the same Dell or HP server they wanted to, and run whichever OS they wanted, or they will get turned off by Dell (let alone if Dell releases desirable hardware that only runs a Windows OS) and take their business elsewhere.
I believe Microsoft may be seriously contemplating the hardware business, without antagonizing its partners. It looks at the incredible turnaround story that is Apple over the last decade, driven by a tight combination of hardware and software. In the 1990s, it failed Apple; in the 2000s, it served them beautifully. Steve Ballmer looks at its biggest competitors and sees:
- Apple: small in the PC market, but very much hip and significantly larger than just a few years ago. No startup in NYC or Silicon Valley is caught dead giving its employees anything other than Macs. In the mobile and tablet market, Microsoft really is dead-in-the-water, despite Surface and its Nokia deal.
- Google: Chromebooks/ChromeOS are still just a hobby, but have possibility. But in the mobile and tablet space, Android is either the largest player or the second-biggest, depending on how one counts iOS vs Android and in which markets. Further, as shown recently, Android is becoming Samsung, an absolute hardware player. And if it has to, Google has Motorola to fall back upon.
Microsoft has always been a copier, rarely a true innovator. Nothing wrong with that, as long as it succeeds. Microsoft looks at the success stories of the last 10+ years, and sees that software and hardware matter. At the same time, Microsoft cannot afford to disrupt its current cash cow by alienating its existing hardware partners, and thus the perception of “shoring up with debt” as opposed to “direct equity investment” are its play.
Look for Wintel to become Windell in the near future.