MicroDell: It's All About the Margins
The New York Times reports that Silver Lake Partners, the private equity firm working with Dell, reached out to Microsoft, and there may be nothing more to this than an investment opportunity.Take a piece of equity in the turnaround, let the private equity boys work their magic, and take your profit on the back end after the costs are wrung out and the public is hyped to buy it back.
Because the ecosystem world is dead, or at least dying.In the new device world of Apple (AAPL) and Android, you must control your inputs in order to control your product roadmap. Google (GOOG) took a financial hit when it bought Motorola, but it now has a stake in the hardware, it knows what things cost and what's possible. The same sort of thing happened after Microsoft signed a partnership agreement with Nokia (NOK) in 2011 -- the Windows Phone business isn't exploding, but Microsoft now has a finer-grained understanding of what's needed.
So this deal, if it's done, seems to be all about the tablet market. That's where Microsoft is especially weak, and where it has to do better if it's to regain momentum. The Surface line is seen as over-priced, and the Windows RT operating system running on ARM Holdings (ARMH) -based chips looks like a total disaster. Something has to be done.
There are analysts like George Kesarios at Seeking Alpha , calling for Microsoft to buy all of Dell, but that would get government anti-trust lawyers involved. As the Nokia deal shows, it's just not necessary.
Since Nokia signed that deal it has lost half its value, and it recently suspended its dividend. Microsoft doesn't need that risk on its books. But Nokia did sell 4.4 million Windows 8 phones in the last quarter, The Wall Street Journal reports, and its downward momentum seems halted for now.
Microsoft has other ways to win with a Dell investment. Dell server racks can help it expand its Azure cloud operations at low cost. Dell's own cloud, which runs on OpenStack, would give it insight into other parts of the cloud market.
If Silver Lake can get a deal done for $25 billion, a roughly 10% premium to Dell's current market cap, Microsoft could take a little less than 20% of that for cash on hand, knowing it has another $60 billion in short-term investments on its books. That would keep Dell's results off Microsoft's books -- Google margins are still being driven down by its Motorola investment.