Microsoft may be seeking protection from Linux with Dell loan
- 05 February, 2013 19:43
Microsoft's US$2 billion loan to Dell is a sign that the software maker wants to influence hardware designs in a post-PC world while protecting itself from the growing influence of Linux-based operating systems in mobile devices and servers, according to analysts.
Michael Dell and equity firm Silver Lake have announced a buyout of computer maker Dell in a deal valued at about $24.4 billion. Dell will continue as CEO of the company, which he founded in 1984. The transaction includes the loan from Microsoft, which in a statement said it views the deal as a commitment to the "long term success of the entire PC ecosystem."
The leveraged buyout is mainly being financed by cash and equity contributed by Dell, cash from investors affiliated with Silver Lake and cash from MSD Capital. In addition to Microsoft's loan, debt financing has been committed by Bank of America, Merrill Lynch, Barclays, Credit Suisse and RBC Capital Markets.
As the world's third-largest PC maker, Dell is important to the success of Microsoft's server and PC software. Even though Microsoft's loan does not represent a big part of the total value of the transaction, the software maker does not throw around money lightly and its participation in the deal might be an attempt by the software maker to influence hardware designs in the post-PC world of touch laptops, tablets and smartphones, analysts said.
It may also be an attempt to secure the partnership and to stop the PC maker from looking toward alternative operating systems like Linux, analysts said. Dell offers Linux servers and in late November introduced a thin and light XPS 13 laptop with a Linux-based Ubuntu OS, also code-named Project Sputnik. Major PC makers in recent months have also introduced laptops with Chrome OS.
"It's a simple symbiotic relationship. Dell is a platform for Microsoft products. Thus, helping Dell helps Microsoft maintain an important customer," said Anthony Michael Sabino, a professor at St. John's University's Peter J. Tobin College of Business, in an email.
The investment could help Microsoft ensure that Dell doesn't drift toward Linux-based operating systems such as Chromebook or Android, said Al Hilwa, program director at IDC. "For them it's a little investment, but it allows them to put strategic influence" behind the device designs and software implementations, Hilwa said.
Microsoft's Windows 8, which shipped in October, so far has failed to lift PC shipments, which fell by 6.4 per cent in fourth quarter of 2012 compared to the same quarter in 2011, according to research by IDC. Dell's PC shipments fell by 20.8 per cent during the same quarter. Few touch PC models were available in the fourth quarter, and PC makers failed to effectively communicate the benefits of Windows 8, which was partly responsible for the drop in PC shipments, according to IDC.
Dell's PC offerings are mainly based on Windows, but the company has been adding Linux to its server offerings. The company has also been increasing its profile in the open-source community with contributions to the OpenStack cloud OS and efforts like Crowbar, which is a software framework for systems management on Linux servers.
With the loan, Microsoft and Dell can build an even tighter alliance around data-center transformation, said Matt Eastwood, group vice president and general manager of IDC's Enterprise Platform Group
"This includes converged infrastructures which power the virtual data center where systems management are critically important, but also integrated systems targeting specific workloads such as data warehousing, analytics and collaboration. These are systems which increasingly require deep joint engineering effort," Eastwood said.
The goal may be to jointly develop high-performing infrastructure that is easy to deploy and manage, but which also delivers faster time to revenue, Eastwood said. There is more focus on applications in such implementations, Eastwood said.
Analysts said privatisation will provide Dell more time to build up a cohesive enterprise product stack while freeing the company from the pressure of delivering quarterly profits and answering investors. Dell for years has been trying to transition from a commodity PC supplier into an enterprise IT vendor, but has had its struggles. Analysts agreed that the company will continue to develop PCs as it may assist in selling more enterprise products.
While Microsoft's loan isn't a major part of the deal, it is large enough to ensure Dell's commitment to Microsoft's products and keep its struggling PC business alive, said Charles King, principal analyst at Pund-IT.
There could also be more touch-based laptops, tablets and even smartphones based on Microsoft's Windows operating systems in the future, King said.
However, a Microsoft-imposed limit on Linux-based product development would not necessarily be in Dell's best interests, King said. Despite Microsoft's loan, Dell will likely remain committed to Linux as it remains important to the company's enterprise offerings.
"I hope for both Dell's and Microsoft's case that the investment was made without strings attached," King said.
Microsoft has already upset some PC makers with its Surface device, which represents yet more competition in the tablet arena, and the investment to Dell could irritate other hardware makers, said Roger Kay, president of Endpoint Technologies Associates.
Looking forward, Dell has to balance the demands of Microsoft with other investors like Silver Lake, Kay said. But given the debt position, Microsoft will have a say in Dell's future.
"It's not going to thrill OEMs, but Microsoft has to look after its interests," Kay said. "There's a lot of motivation for Microsoft to be involved."