Thursday, January 24, 2013

Microsoft's invests in Dell to cut off Linux?

Update: It's official. Microsoft has a hand in taking Dell private to the tune of 2 billion. Is this a loan like the 'investment' was in Apple?
Dell is considering taking itself private. This is nothing odd, most successful companies with a large cash pile will consider buying back their public shares, taking them private. They would then do business as usual for a time before taking themselves public again, this time at a higher value. If you are interested why, there are some possible reasons why explained at the end.
So while Dell considering taking themselves private is not really interesting to technology watchers, the rumor that Microsoft and Silverlake Partners is reported to be involved in the buy back of those shares and coming in as investors is interesting. So why now? And why Dell? Microsoft has not been successful with hardware (other than their mouse and keyboards). Xbox is a success but it's success comes from games software and subscription services rather than just hardware alone. Case in point, the Microsoft Tablets and the Zune. So the question is what would Microsoft gain from having a say in the running of a PC manufacturer.
This could be another front Microsoft is pursuing against Linux. Dell made it no secret that they were investigating the viability of having Linux as a desktop OS option. The well reviewed Dell XPS 13 Developer Edition or Project Sputnik and regional versions of laptops pre-loaded with Linux are examples of their efforts. The adoption of Linux as a Desktop OS option by a major PC manufacturer would spell big trouble for Microsoft. While Dell has offered several Linux OSes such as RedHat and Ubuntu as options for a server OS, this has not been a real threat to Microsoft. This is because of the use of Linux on servers has a low consumer profile and the fact that Microsoft makes more money on the connection licences on the server than the sale of the server OS itself.
Another interesting twist to this story is the involvement of Silverlake Partners. While many know of their collaboration with Microsoft on the Skype deal, the people behind both companies share a more darker past in relation to Linux. Both are entangled in some way with SCO as it was launching it's legal battle against Linux.
Is there something more to this?
Both companies could be doing this for their own reasons and it could be tied down very much to the fate of the Personal Computer. Microsoft cannot afford to lose a major manufacturer to an alternative OS, Linux or Mac (more on that later). It's a simple case of herd mentality. If one PC maker can do it, the others will follow suit. Microsoft saw glimmers of that in the netbook market. It had to backtrack and keep XP on the market longer to save itself that time. Not that the Linux distributions pre-loaded on the netbooks did Linux any favors.
Dell is also finding selling PC to businesses less profitable and it's efforts to branch into services may not have  given it the returns it expected. With the Vista-esque acceptance of Windows 8, Windows Phone gaining the reputation of stabbing it's buyers in the back and the mess that is Window Tablet (RT? Pro?), Dell probably sees a hazy future. This move to go private and the investment by Microsoft will allow it some thinking time. Time to figure out how to address and maybe influence business customers in their IT purchases as the world marches towards tablets and OS independent services without hurting their valuation. (Yes, more and more people are finally realizing that Outlook is not the only way to get e-mail). Once the dust settles on the next best thing and Dell is able to make a profit from it, it will probably go public again with much of it's value intact.
There is a dark horse in the PC future, the second most popular desktop OS. A Steve Job-less Apple, could license the MacOS to selected PC manufacturers. This is much easier than before because both the PC and Mac use Intel-based processors. The similarities in hardware is the reason for Hackintoshes. But Apple this time would do it in a way where it has final say on the hardware and software issues to re-create that Apple/Mac experience. With Mac software sold via the Mac App store, Apple would have a leash to control these manufacturers. This model has been done before with great success: Google and the Google Nexus phones. This move would serve only to increase Apple's dominance in the overall computing market and could open it up to third-party innovations such as MacOS thin-client terminals.
In the end, there could be nothing more to this than simple greed. Michael Dell has been involved with SilverLake Partners before. He can see a rocky road ahead for PCs and this could be a way for Dell to ride it out safely.
So why do public companies go private? Some companies do this to isolate themselves from the public investor. They could be afraid that the public investor may not like what they are about to do. The public investor may not agree with a company's actions and will vote with their shares, bringing the price of the shares down and the value of the company. This is usually the case when the company decides to invest in something that will generate returns in the long term. In fact, it is not uncommon for a company's share price to drop after announcing a profitable quarter. The public investor usually invests for the short term. So while a company may post a profit, it may not be the profit the investor hoped for. Blame analysts for that.
Another reason a public company goes private is because the company has something big in works that will likely generate a high amount of return and would like only the major investors to benefit. They would take the company private which removes a lot of the public reporting requirements. After generating the profit, the major investors would gain from dividends paid out and the re-listing exercise where the increased interest in the company will drive share prices up.

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