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Summary:

Both Microsoft and Dell face lagging stock prices and the perception that they both missed the boat in mobile. But the two companies also face very real threats to their core enterprise IT businesses.

Microsoft CEO Steve Ballmer

Most of the commentary about a reported investment by Microsoft into hardware partner Dell has centered on the fact that both companies have missed the consumer, mobile boom and need to make up ground.

But there is a very strong enterprise technology angle here as well. Microsoft needs to entrench Hyper-V and the latest Windows Server in data centers, something a Dell stake could accelerate. “Look, Microsoft needs a phone and a tablet buddy, but it also needs to make sure its core server and virtualization technologies get deployed,” said a former Dell executive who requested anonymity. (Spokesmen for Dell and Microsoft would not comment for this story.)

Preserving the enterprise stake

“Dell, by virtue of its Wyse and Quest acquisitions has a robust zero client business and if you see a big flip in IT with people leaving local hardware and software for stuff driven from the data center via terminal services or VDI, Microsoft needs help there,” said Dana Gardner, principal analyst with Interarbor Solutions and a GigaOM Pro analyst. “It has to make sure its software is running in the data center whether it’s in the cloud or corporate,” he added.

And, mobile is also driving corporate IT in a BYOD world where Apple’s iPhone and iPad schooled both Microsoft and Dell in part because it offered a tightly integrated hardware/software bundle. Microsoft and Dell together, in theory, could offer more of that integration together.  Microsoft CEO Steve Ballmer and counterpart Michael Dell have both been under fire for failing to keep their stock prices up and the perception that they missed the boat in mobility.

MSFT Chart

MSFT data by YCharts

Still, the idea that Microsoft — which made its fortune parlaying an army of hardware partners and being careful not to play favorites — may now take a stake in a PC maker is mind boggling. Microsoft dipped its toe in hardware by deciding to make Surface, but if it wants to get serious, it needs to do something bold, and buying into Dell would be bold,Gardner said.

It also might hedge bets if HP decides to spin off or sell its PC business.  HP is another huge Microsoft hardware partner in both consumer and corporate markets.

Dell management offers clues to buyout plan

Another former Dell exec, who said he has no knowledge of any deal, said a look at the company’s leadership offers a clue as to why it might opt to take itself private.

Two top-ranking Dell execs — John Swainson, president of software, came aboard after a stint as an advisor to Silverlake Partners — the private equity firm reportedly backing a buyout. And, Marius Haas, president of enterprise services, came from Kohlberg Kravis Roberts. If a buyout happens, it’s likely that Michael Dell would step down and one of those two executives would become CEO, this source said. Swainson, who was also once CEO of CA, might be the logical choice.

  1. Dell going private doesn’t make any sense to me. If they go private they will have to take on more debt to make it happen. This extra debt will make it harder for Dell to continue making acquisitions.

    With this new going private strategy and the recent exit of Dell’s head of M&A, I wonder if Dell is giving up on the acquisition strategy. If that is the case then I don’t understand how they plan on turning things around.

    Dell has steadily been losing PC market share to HP and Lenovo. From what I have read PC’s still make up 70% of Dell’s revenue in one form or another. So, exactly what is Dell’s plan? Are they going to now become more aggressive in PCs after allowing themselves to lose market share for the last two years or so?

    If they aren’t going to make more acquisitions then do they think that they are going to be able to make the transition through organic R&D? Dell has never been known as an R&D company. So that would be a big shift.

    Dell doesn’t make sense to me anymore. Maybe their game plan is to encourage Microsoft to buy them out.

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  2. Agree – they are both desperate. Whether or not the buyout happens, the fact that this is even a point of discussion shows how far they have fallen. If it weren’t for the inertia in corporate IT purchasing, the slide would be even steeper.

    @jhesr Buyouts make sense when you are trying to be the first to the top of the mountain. But when your business is imploding, sometimes the best thing to do is to pare back and focus on what you can do well and profitably. Dell going private is going to mean spinouts, not acquisitions, and that makes a lot of sense given the limited growth prospects in their current business. Yes, they will have less market share, but if they do it right they will still have a business, at least — and that means a chance to hang on to ride the next wave. Maybe the second coming of Michael Dell will bring to that company something like what the second coming of Steve Jobs brought to Apple.

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  3. @Matt,

    What you are saying makes sense and matches up with what is happening. However, I still find it hard to believe that Dell is basically throwing in the towel.

    When Dell’s M&A chief left I was very surprised because Michael Dell has been saying for years that Dell’s strategy is the IBM strategy. That they will become a services, software, and hardware conglomerate. When their head of M&A left I was like, “hold on a second, he isn’t finished yet, not by a long shot.”

    Dell still has a very long way to go if they want to be like IBM. Looking at Dell’s portfolio they have competitive server offerings (but this business is being commoditized slowly like PCs have). They also have storage and networking products, but they are not competitive enough. Storage has been losing revenue and market share each quarter and for networking all they have is a switch. Looking at services they are competitive there, but only on the small/medium side. Their services division is not large enough for the big deals. Lastly, in terms of software they have some good products, like Quest, but that is not nearly enough to move the needle.

    Dell is still primarily a PC company as much as they may not like it, that is where they are at right now. If Dell gives up on the IBM strategy, I don’t see them finding it any easier sticking with PCs. That business has not had good margins for a long time, and now with Lenovo it is just going to be even harder. Lenovo doesn’t seem to care if they have margins of only 1%. I think it is more a matter of national pride for them (China) that they own the market. I have read that Lenovo is one-third owned by the Chinese government.

    Is Dell really going to throw in the towel on the IBM strategy??? Maybe they are.

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  4. They are simply re-arranging the deck chairs on the Titanic.

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