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Microsoft Dell deal would restore PC makers' confidence

Things don't get much worse than 'bad-to-neutral'

Analysis The PC business could experience not one but two seismic events on Monday.

First, the world’s third biggest PC maker is expected to announce a $20bn leveraged buyout, taking it off the stock market and putting it back into private hands.

Twenty-five years after Dell floated, the PC maker’s management would no longer be accountable to investors and would be able to operate shielded from the scrutiny of those holding its stock.

It’s a comment on the times that Dell floated in 1988, just as IBM compatible PCs – systems running Intel chips fused with the then-new Windows operating system – were exploding into people's homes and workplaces, taking the PC from the hands of enthusiasts. Two decades later, Dell's going private as PC sales tumble at the expense of tablets while web2.0 companies such as Facebook, LinkedIn and Zynga are the ones listing.

A private Dell means management would no longer be subject to the whims of Wall St and the level of mandatory scrutiny that comes with holding other people’s trust. Management would be answerable to new masters, bringing us to the other big event: one of those is likely to be the world’s largest software maker - Microsoft.

Microsoft, along with VC Silver Lake Partners, is reported to have lined up $15bn from UK and US banks to finance a deal, making them minority investors in a private Dell. Reports value an estimated $3bn Microsoft contribution as a 10 per cent stake.

Microsoft is no mere investor though; it's also responsible for Windows - the lifeblood of Dell’s PCs and servers until the PC giant switches to mass-market Linux. For all their problems, Windows PCs and servers remain Dell's primary businesses as Dell moves into services, networking and the cloud.

For Dell's PC rivals this represents a potentially huge conflict of interest. Microsoft will want to leverage its position to ship more Windows 8 machines, particularly tablets like Surface.

Redmond blames OEMs for not following its advice and failing to make what it considered enough touch-based tablets in the run-up to Christmas - hence underwhelming sales. But the PC makers have fought back against Microsoft, saying if they had followed its advice they'd have been stuck with piles of unsold slabs.

Who's going to lose out?

In Microsoft's mission to promote Windows 8 touch, Dell therefore stands to gain preferential treatment on a range of fronts including: early development of Windows, favorable licensing, marketing, and all-important pre- and post-sales and technical support.

So far, Microsoft's Surface presence is relative cursory - in terms of both the low number of Surface RT units manufactured and sold - with PC makers telling us they are unconcerned about the potential impact of Surface Pro, this month.

“We are not particularly worried about [Surface] Pro,” one large OEM told The Reg.

That might change with a Microsoft stake in Dell, though. One major PC maker pointed out: “They [Microsoft] will be making one of our competitors more formidable, that’s for sure.” He reckoned this might be a particular issue for Hewlett-Packard and Lenovo, who have been struggling with Dell to be the market’s number one and have a huge lead over every one else.

If there’s any positive from a Microsoft’s investment, it’s that PC makers feel it will keep Microsoft honest on Surface. In other words: force Microsoft to be more transparent about its plans, because Microsoft would potentially be forced to share plans with those outside its home-grown product groups and beyond the great Redmond firewall.

One of the biggest criticisms of Microsoft on Windows 8 and Surface has been the lack of communication with partners on everyday details that they'd received in the run-up to earlier new releases of Windows. These included plans on features, delivery dates and launch plans. The Microsoft Windows group under president Steven Sinofsky was obsessive in the degree of secrecy and control it exercised over the development and communications about Windows 8.

One PC OEM source classified the current situation with Microsoft as “confusing” and rating it as "bad to neutral".

Another concern is confidentiality of sensitive commercial information. There's a feeling that information shared in meetings with Microsoft's Windows group inadvertently finds its way to those working on Surface. "I have had meetings with Microsoft about products that contain confidential information... they then reassure us and say it’s different groups,” our source said.

“Microsoft is trying to invest from a zero base - that’s where the confusion is coming from. We don’t mind dealing with competitors but Microsoft is a wild card and we don’t know what the impact will be.”

Taking a stake in Dell would clarify the rules and the relationship.

"If a company like Microsoft takes a stake in an independent PC manufacture, even a minority stake, it would come with certain agreements they it must follow.”

Microsoft’s influence on Dell would also be constrained by the presence of the competing interests of other stake holders Silver Lake and Michael Dell, reported to be expanding his stake. This would further make a Microsoft stake an improvement on the current situation. Silver Lake’s portfolio includes Avaya, Go Daddy, GroupOn, Skype and Zynga in addition to a raft of bread-and-butter enterprise software, data and services companies.

“There will be other shareholders who will want to make sure Dell continues to operate in their interests,” our PC maker said.

With the PC market in meltdown, Dell is making a sane move by taking shelter from Wall St to re-invent itself from behind a private wall. Ironically, a private Dell might might also help restore the sanity to Microsoft's relationship with PC makers - a relationship damaged by its secrecy and obsession over Windows 8 and touch. ®

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