Tuesday, June 25, 2024

Private Dell + Microsoft: Now This Could Be Interesting

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Dell has been signaling for some time that it wanted to go private.

The benefits are clear: they could operate more strategically for a few years and rebuild the company for the future they believe is coming. And they could avoid problems with financial analysts pounding their stock into insignificance because of capital spending, acquisitions and sharply reduced profits during the time of transition. Going private also reduces substantially the costs associated with being a large public company, which can pull more than 20 percent off the firm’s bottom line.

However, the problem is that a firm of Dell’s size typically can’t find enough long-term investors to keep the amount of debt, and related interest, down to a manageable level. The cost of debt financing coupled with the natural increase in the firm’s valuation just before the deal is executed can make it almost impossible to complete.

Microsoft has a lot of cash to invest. It is fighting against the idea that it is becoming obsolete, and it could be worried companies like Dell may decide to go vertical. With one move, Microsoft would get a strong investment where they have a great deal to say about its success and a far closer partnership with Dell.

On paper, the result could even make Apple nervous.

This proposal isn’t without risk, and it isn’t a done deal yet. But the result could be a very interesting.

The Problem

The problem with this deal is Microsoft’s other partners. Firms like HP, Lenovo, Acer, Asus and Samsung may take issue with Microsoft getting so close to one of their competitors. The Dell deal could actually accelerate their moves away from the Microsoft.

Were this to happen the collateral damage from those firms moving away from Microsoft toward a competitor like Google could easily exceed the benefits to Microsoft doing the deal.

However, with Google’s Motorola’s ties and its reputation for being harder to work with than Microsoft, that avenue isn’t very attractive. So if Microsoft can firewall this deal, and convince these outside partners that the firewall will hold, they’ll likely go along—grudgingly.

Is VCE The Answer?

There is one partnership that could be used as a template for what Dell and Microsoft are exploring. That is the VCE partnership among Cisco, EMC, VMware, and Intel.

EMC nearly owns VMware. But VMware continues to operate relatively unfettered with EMC’s competitors. Intel has put substantial resources into the partnership, but that hasn’t seemed to hurt their relationship with the firms that compete with VCE. To make VCE work, it was designed with the attributes of an independent company but the backing of powerhouses.

And this could provide a baseline that AMD, Intel, Juniper Networks or some other major player might want to get in on. They could both co-fund and benefit from the result.

What About Surface?

The one other interesting part of this deal is what would likely happen to Microsoft’s Surface tablet.

Ideally, Surface could be handled by the VCE-like partnership or Dell itself. I wouldn’t be surprised to see some kind of play that makes Surface and the additional planned Microsoft hardware some part of this deal.

If backed by both vendors, the resulting products could be far more powerful and the lines more complete. If they do contemplate a VCE-like move, the Surface team could become the executive managers of this new partnership entity, along with a bunch of Dell volunteers.

Wrapping Up: This Is Potentially Very Big

What really makes this news big is the change in the relationship between Microsoft and one of its most powerful and most engaged partners.

Done right, what could emerge is a vastly more coupled set of products—software that more aggressively takes into account hardware improvements and hardware that more aggressively drives software improvements. This could do a lot to fix what has been a large communications gap between Microsoft and all its partners. And it could result in a new virtual entity that rivals VCE but targets the consumer and mid-market much more aggressively.

In short, Apple should likely worry about this one.

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