Microsoft May Back Dell Buyout

With desktop PC sales sharply dropping off thanks to consumer enthusiasm for tablets and other portable computing devices, hardware maker Dell is trying to go private so it can steer a different course, without stockholders looking over its shoulders. This week, it seems to have gained an unlikely ally: Microsoft.

The Guardian UK reported the painful numbers that seem to be inspiring this move: Dell saw the number of PCs it shipped to retailers fall by 12 percent last year, and its stock market value contracted by a third. Dell isn’t the only one in trouble, either; the newspaper notes that 2012 saw the first drop in PC shipments industry-wide since the end of the dot-com crash more than a decade ago.

Private equity group Silver Lake Management will lead the buyout, along with Dell founder and CEO Michael Dell. It is expected to be one of the larger leveraged buyouts in history, valued at around $22 billion. But Microsoft reportedly wants in on the action as well. CNBC reported that the software giant hopes to invest $1 billion to $3 billion in the LBO.

So why is Microsoft interested in the PC maker? It’s not too hard to figure out. Microsoft made its own hardware for a Windows 8 tablet recently, but the operating system sits on far more machines made by other companies. As a hardware manufacturer with strong sales to businesses and corporations, Dell has always supported Microsoft; the vast majority of its PCs run some version of the Windows operating system, to say nothing of the software giant’s business applications. On some level, Microsoft needs large hardware manufacturers like Dell to stay in business to keep selling its software products.

Both companies are refusing to comment on the complicated deal. Matt Egan  lays out some of the tricky issues. Michael Dell has a 16 percent stake in his own company. His involvement in the buyout effectively puts him on both sides of the deal, however. Egan notes that “On the one hand, Michael Dell has a duty to secure the best price for shareholders. On the other, too rich an offer could make it harder for the buying group, which he is an integral part of, to pay down debt and see a meaningful return on its investment.”

In a situation like this, one of the ways to protect shareholders involves enlisting the aid of an independent committee with its own team of experts (investment bankers and lawyers). That committee would get to have the final say on the transaction. These people should not have a significant ownership stake in the company. But where would Dell find such people? Egan notes that “everyone on Dell’s 12-member board other than Michael Dell is listed as an ‘independent’ director, including lead independent director Alex Mandi.” How many of these people are truly independent?

Microsoft’s involvement in the buyout isn’t without its own interesting PR risks. The software giant already upset several other PC makers by putting out its own tablet, the Surface. The move made the company seem more like a rival than a partner in the eyes of HP and other computer manufacturers. By investing such a significant sum into a leveraged buyout of Dell – even though the amount invested would only give Microsoft a minority interest – the operating system maker risks increasing friction between it and its long-time allies.

Still, it wouldn’t be the first time Microsoft made a potentially controversial investment. Back in 1997, it invested $150 million in Apple, and engaged in patent and cross-licensing agreements with its rival. Had Microsoft held on to the 18.2 million Apple shares it gained  from that deal, they would be worth $9.18 billion today (given the stock’s current price of $504.77 per share).

Microsoft did sell the Apple shares at a profit quite a few years ago. With Dell hoping to make some major changes after the LBO, we’ll see what Microsoft gains from the deal. Whether the software giant actually invests or not, it is expected to close by the end of the week.