January 23, 2013 – A possible Dell buyout this week wouldn’t mark a new era of private equity takeovers, says one expert, but could strain the relationships of potential suitor Microsoft.
Dell is close to clinching a leveraged buyout by Silver Lake Management LLC, and Microsoft is discussing providing part of the funding, people with knowledge of the matter said yesterday. Microsoft may contribute about $2 billion for the deal, which could be announced this week, one person said.
Dell Inc.’s move toward a leveraged buyout doesn’t signal the return of multi-billion dollar private equity deals, Blackstone Group LP Chief Executive Officer Stephen Schwarzman said.
“This isn’t your run-of-the-mill situation,” Schwarzman, 65, said in an interview with Bloomberg Television’s Erik Schatzker at the World Economic Forum in Davos, Switzerland today. “This is a pretty unique set of circumstances with a fundamentally unleveraged company with an owner and founder that can put up a lot of the equity to make the deal happen.”
Blackstone didn’t look at buying Dell because the PC business “is a tough road,” Schwarzman said.
“The financial elements of the deal are very clever,” he said. “The issue is going to be how the business actually performs.”
The firm invested about $4 billion out of its $16 billion leveraged-buyout fund last year, Schwarzman said.
An investment would shore up a partner and help Microsoft gain influence in business computing as it loses ground with consumers gravitating toward competing tablets and smartphones. PC makers also may fret that the arrangement will give Dell an advantage, such as through an early look at new software, deeper insight into strategy or preference in product marketing and promotion. Microsoftbecame a competitor to hardware manufacturers with the release of the Surface tablet last year.
“If you’re a vendor that wasn’t happy with Surface, the idea of Microsoft owning part of Dell is not going to cheer you up,” said Michael Gartenberg, an analyst at market-research firm Gartner Inc. “But if you’re Microsoft and you feel you need to do more devices, and that hardware and software need to be more integrated, the ability to have major influence on a big PC vendor opens some interesting opportunities.”
Frank Shaw, a spokesman for Redmond, Washington-based Microsoft, and David Frink, a spokesman for Round Rock, Texas- basedDell, declined to comment.
Microsoft, the world’s largest software maker, tested ties to the PC industry last year when it unexpectedly announced plans to start selling the Surface. The tablet has gotten off to a disappointing start, and it’s not yet clear how formidable a competitor Microsoft will be. Brent Thill, an analyst at UBS AG, halved his estimate for Surface sales, to 1 million units in the fiscal second quarter, which ended in December, citing “gloomy sentiment” after the holiday shopping season.
Still, it makes sense for cash-rich Microsoft to prop up a seller of PCs and tablets that feature its software. Both companies are struggling to mount a credible response to Apple Inc. and Google Inc. in the market for mobile computers.
Microsoft had $66.6 billion in cash and short-term investments at the end of September.
Dell, the third-largest PC maker, is just one of a handful of vendors selling a tablet with Windows RT, a version of Microsoft’s Windows for chips based on ARM Holdings Plc technology. Dell will also begin shipping a separate tablet using the flagship operating system, Windows 8, this month.
Computer makers and Microsoft are facing a prolonged slump as PC shipments are forecast to drop for the second year in a row in 2013. They fell 4 percent in 2012 and will slide another 1.5 percent this year, according to estimates by JPMorgan Chase & Co. Tablet sales rose 72 percent last year and will surge 54 percent this year, JPMorgan forecast.
“The entire PC ecosystem is in a world of hurt right now, and it’s uncertain whether the PC market returns to a growth market,” said Israel Hernandez, a San Francisco-based managing director at MKM Partners LLC who has a neutral rating on Microsoft. “They both have a vested interest in making sure the PC market can once again survive.”
By becoming a private company, Dell could shift focus to its services business and away from PCs, said Wes Miller, an analyst at Directions on Microsoft, a Kirkland, Washington-based research firm. Microsoft may have decided it needs the investment to keep Dellfirmly in the PC market, he said.
The strategy nevertheless may not sit well with other partners, particularly HP, the top PC maker, he said. Michael Thacker, a spokesman for Palo Alto, California- based Hewlett-Packard, declined to comment, as did Jeff Shafer, a spokesman for Lenovo Group Ltd., the No. 2 PC maker.
Microsoft’s possible Dell investment draws parallels with Google’s acquisition last year of handset maker Motorola Mobility Holdings Inc. The deal was met with speculation that Google, backer of the Android operating system, would somehow favor hardware made by Motorola -- becoming a competitor to other Android users, Miller said.
“People said a lot of anticipatorily bad things when Google acquired Motorola, and none of the bad things people predicted have come to pass,” he said.
Microsoft went down a similar path in 2011, when it announced a strategic agreement with handset manufacturer and Windows Phone licensee Nokia Oyj. Still, Microsoft maintains a close relationship with other Windows Phone sellers, including HTC Corp.
Microsoft would add to a lengthening list of large strategic investments in technology companies. The software maker has a stake in Facebook Inc. and invested $300 million in a Barnes & Noble Inc. subsidiary to focus on e-readers. It also invested $5 billion in 1999 into what was then AT&T Corp.
This also isn’t the first time Microsoft has considered bolstering a potential Silver Lake deal. In 2011, the software maker offered to help fund an offer by Silver Lake and other firms to acquire a minority stake in Yahoo! Inc., people familiar with the matter said at the time. The deal never materialized.
Microsoft invested $150 million in then-foundering Apple in 1997. The investment contributed to the very survival of Apple and helped put the company on the long path toward becoming the world’s most valuable company.
An investment in Dell would be distinct in many ways, Miller said.
Apple was “a pity infusion in a near-bankrupt company,” he said.
Microsoft doesn’t own part of Nokia, and Google’s Android is free. That means Google owes less consideration to partners that use the software, whereas PC makers pay Microsoft to use Windows, Gartenberg said.
While PC makers might have a reason to feel aggrieved if Microsoft winds up owning part of Dell, they don’t have very many means of redress, he said. Apple doesn’t license its software to outside vendors. Google also competes with partners and its software isn’t popular on desktop computers.
Microsoft meanwhile needs to focus most on how to restore growth to its Windows business, which has fallen short of analysts’ estimates in six of the last eight quarters.
“Ultimately Microsoft is responsible to its shareholders, not for how well its partners do,” Gartenberg said. “Partners need an operating system, and the operating system of choice on personal computers is Windows. They may have to live with it.”
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