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Updated January 23, 2013, 12:20 a.m. ETMicrosoft Joins Dell Buyout Talks as Effort Advances
- By ANUPREETA DAS, SHIRA OVIDE And BEN WORTHEN
The proposed buyout of Dell Inc. DELL +1.51%has another spark: Microsoft Corp. MSFT +1.14%
The software giant entered discussions in recent days with private-equity firm Silver Lake Partners and Dell founder Michael Dell to buy the computer maker from public stockholders, according to people familiar with the deliberations.
Microsoft hasn't made a commitment to throwing its money and weight behind the possible deal, which is expected to carry a price tag of $22 billion or more.
But if Microsoft were to participate in a Dell buyout its investment likely would be roughly $2 billion, of the people familiar with the talks said. A dollar amount of that size could give Microsoft one of the largest ownership interests in a private Dell.
Microsoft is in discussions about helping to finance a buyout of computer maker Dell, David Benoit reports on digits. Photo: Getty Images.
Spokesmen for Microsoft and Dell declined to comment.
Microsoft wouldn't be involved in day-to-day operations at Dell under the arrangement being discussed, one of the people said, but Dell would agree to use Microsoft's Windows software to power the vast majority of its devices. Dell is already one of the largest makers of computers running Windows.
Such a deal would continue Microsoft's recent pattern of making financial investments in technology companies, which typically comes with a say in how they support Microsoft's technologies or services.
Involvement by Microsoft would also bolster the complicated effort to take Dell private. Dell shares rose 2% to $13.12, while Microsoft slipped 0.4% to $27.15.
People familiar with the discussions said a Dell deal could come within a week. Four banks are expected to divide up a roughly $15-billion financing package. The buyout group is expected to pay for the cash portion using a mix of Silver Lake's equity, Chief Executive Michael Dell's nearly 16% stake, and potentially Dell's own cash and the investment from Microsoft.
One person familiar with the talks, which were earlier reported by CNBC, said Microsoft would receive preferred security in exchange for its investment. That arrangement would give Microsoft a stock-ownership stake in Dell, but could carry some of the benefits of being a debt holder, such as ensuring Microsoft gets repaid before other stockholders if Dell were to go bust.
People familiar with Microsoft's thinking said the company is willing to strike various partnerships or alliances that are less risky than buying a company outright, in return for arrangements that give Microsoft influence over the companies' future strategy and use of Microsoft products. - For example, Microsoft in 2011 struck a partnership with struggling mobile-phone maker Nokia Corp. NOK -1.45%Microsoft didn't buy an ownership stake in Nokia, but Microsoft agreed to plow billions of dollars into marketing, research-and-development and other support for the Finnish company. Nokia in return agreed to license Microsoft's operating software for smartphones.
The phone software, called Windows Phone, continues to struggle, and the investment in Nokia hasn't stopped Microsoft from discussing plans to build it own phones that would compete with Nokia's.
Microsoft last year also pledged $605 million to support Barnes & Noble Inc.'s BKS -0.08%Nook tablet, digital-book and college-bookstore businesses—areas that Microsoft considers important to its technology.
Writing a multi-billion-dollar check for a Dell buyout wouldn't be a struggle for Microsoft, which had more than $66.6 billion in cash and short-term investments as of Sept. 30.
And there is a potential financial advantage: While most of that cash is overseas, Microsoft would be able to bring back some of the money tax free.
A provision in the code allows foreign subsidiaries of U.S. companies to invest money in U.S. corporations as long as they're not investing in their own companies or taking a stake larger than 25% in the U.S. corporation.
But there is a big risk in owning a piece of Dell: Microsoft could be seen as playing favorites among PC makers that buy its software. Those fears continue to dog Google Inc. GOOG +0.29%and mobile-device maker Motorola Mobility, which the Web-search giant bought last year.
One tech industry executive said Tuesday that if Microsoft invests in Dell, other computer makers would have incentives to throw their weight behind Google and its efforts to sell software to big businesses, or enterprises. "Nothing will open the door for people to make Google enterprise ready faster than this," this executive said.A Google spokesman declined to comment.
Still, analysts and one person familiar with Microsoft's thinking said owning a chunk of Dell could provide an insurance policy of sorts, strengthening an ally that makes computers and other hardware while influencing its strategic direction.
The Dell talks come as the market for PCs has stalled. Shipments of the machines in 2012 fell 3.2% from a year earlier, according to IDC. Instead, people are opting for tablets, smartphones and other devices from Apple Inc. AAPL -1.39%or based on Google's Android software.
Among PC makers, Dell has been one of the hardest hit, with shipments dropping 20.8% in the fourth quarter from a year ago, according to IDC. The company has said in the past that it is focused more on selling products like servers, storage systems and security software for businesses, which are more profitable than PCs.
Even as Microsoft has tiptoed into making its own computers with the tablet-style Surface, Chief Executive Steve Ballmer has said it is essential for the company to continue to have a diverse group of companies making PCs that are powered by Microsoft software.
Mr. Ballmer has a long-standing personal and professional relationship with Mr. Dell, who is expected as part of the proposed buyout to contribute his stake in the company's stock.
"I suspect it is not about the financial income this might generate for Microsoft as much as helping Dell to remain in a long term competitive position and good partner to Microsoft," said Rick Sherlund, an analyst with Nomura Securities.
Some Microsoft officials privately have expressed disappointment with the recent slate of PCs and tablets being released from its allies, including Dell. Some analysts said the potential investment could give Microsoft more influence over the design and strategy of Dell hardware.
"I think Microsoft has identified this is an issue and is trying to have more say in its destiny," said Al Hilwa, an analyst with IDC.
The potential Dell investment echoes a deal Silver Lake was trying to put together in the fall of 2011 for Yahoo Inc. YHOO -0.49%Then, Silver Lake had lined up one of the investors in its own fund, the Canada Pension Plan Investment Board, and Microsoft to put together a proposal to buy all or part of Yahoo. Under that deal, which never came to fruition, Microsoft would have put up several billion dollars to help fund the purchase.
The connection between Silver Lake and Microsoft goes back at least to May 2011, when the private-equity firm agreed to sell Internet-calling company Skype to Microsoft for $8.5 billion. Silver Lake and CPPIB were among the co-owners of Skype. Silver Lake invested about $1 billion in Skype, and fetched roughly three times its investment from the sale.
—Amir Efrati, Vipal Monga and Joann S. Lublin contributed to this article.
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