Why Would Microsoft Want To Purchase A Piece Of Dell?

By Tim Parker | January 31, 2013 AAA

Microsoft (Nasdaq:MSFT) recently reported less-than-impressive earnings. Unofficially charged with saving the PC from extinction, Microsoft needed to report that Windows 8 was the biggest hit since the iPhone. That hasn't happened.

The company sold 60 million Windows 8 licenses, but a drastically slashed price of $39.99 and a marketing budget that caused a 49% increase in expenses make that number less impressive than it sounds on the surface. Speaking of Surface, Microsoft's new tablet isn't off to the market-disrupting fury that the company hoped. The PC market is still in decline, and Microsoft has seemed a little helpless to stop it in the last few years.

These results make it even more unexpected that a company such as Microsoft would have any interest in Dell (Nasdaq:DELL). Investors have long avoided catching so-called falling knives. In this case, Microsoft seems to be doing just that. What are its motives? Nobody knows that yet, but here are some of the ideas experts are throwing around.

SEE: A Primer On Investing In The Tech Industry

Rekindle the Fire!
According to Gartner, PC sales are down 4.9% year over year, but a Windows operating system is still on 91% of all PCs. Microsoft has divisions outside of the PC, such as the entertainment and devices division with the Xbox as the primary product. But the company still relies heavily on PC demand to drive revenue.

Does Microsoft want a piece of Dell in order to take on the gargantuan task of reviving the PC market? CEO Steve Ballmer says he does not believe that any one company should control the hardware and software ecosystem, but with the tepid response to Windows 8 from hardware manufacturers around the world, he may rethink his view.

Merle McIntosh, senior vice-president of product management of Newegg North America, said Windows 8 hasn't taken off the way it had hoped. David Chang, CFO of Asus, said, "Demand for Windows 8 is not that good right now." These comments follow similar comments from Hewlett-Packard, (NYSE:HPQ) Acer and Fujitsu. It is clear that PC manufacturers and retailers as well as PCWorld, which called Windows 8 "unintuitive," aren't completely behind the new OS.

Could Microsoft produce a complete hardware and software package strong enough to save the PC? The Surface proved Microsoft has interest in trying. So far Microsoft's attempt at a tablet that would rival Apple's (Nasdaq:AAPL) iPad doesn't appear to be off to a rousing start, evidenced by the fact that Microsoft was unwilling to provide specific metrics about its sales in its last earnings announcement.

In a 2012 shareholder letter, Ballmer said, "There are several distinct areas of technology that we are focused on driving forward." This, according to Ballmer's letter, included "firmly establishing one platform, Windows, across the PC, tablet, phone, server and cloud to drive a thriving ecosystem of developers, unify the cross-device user experience, and increase agility when bringing new advancements to market."

Microsoft seems to have an interest in developing an ecosystem, like Apple's that includes all elements.

SEE: Technology Sector Funds

History Is a Guide
In 2008, when Microsoft was trying to purchase Yahoo! (Nasdaq:YHOO), Ballmer said that the company's interest in Yahoo! was to gain ground in the search market control held by Google (Nasdaq:GOOG).

Then, the company made a $600-million investment in Barnes & Noble (NYSE:BKS). This gave Microsoft a 17% share in a Barnes & Noble subsidiary that included the company's e-book division. This was clearly an attempt to gain market share in the growing e-book revenue stream.

Neither of these investments had the desired effect; Microsoft hasn't become a major player in either of these markets. Microsoft has not proved its ability to find early disruptors and capitalize on the uptrend.

Trip Chowdhry, senior analyst for Global Equities Research, doesn't buy into the idea. He said that if Microsoft has a spare $1 billion to $3 billion to throw around, it should hire the smartest design and manufacturing minds it can find, build a state-of-the-art manufacturing unit, and create the next market-changing product. According to Chowdhry, it wouldn't cost much more than taking a stake in Dell. He thinks that rather than holding on to old technology, the company should look ahead to new.

SEE: Microsoft Vs. Apple

The Bottom Line
Although there are reasons Microsoft would want to put money behind Dell, none of them, at least on the surface, seem very sound. Microsoft hasn't found a lot of large-scale success by investing in other companies. Its Dell idea has investors scratching their heads.

At the time of writing, Tim Parker owned shares of Apple since 2012.

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