Microsoft May Help Finance Dell Buyout

Microsoft is reportedly in talks with various parties involved in an effort to take Dell private. According to reports, Microsoft is interested in harnessing a few billion dollars of its large cash hoard in a loan that could turn into equity in the future.

Microsoft CEO Steve Ballmer

Microsoft CEO Steve Ballmer and Some of His Cash Hoard

Rumors began swirling last week that a private equity group was interested in taking Dell private. Dell founder Michael Dell is reportedly involved with the group, which also includes Silver Lake Partners, the primary private equity firm behind the move.

The issue is going to be financing. It will take north of US$20 billion to buy the company—Dell's market capitalization has risen to almost $23 billion on the buyout rumor—and it turns out that money has to come from somewhere.

The way it would (loosely) work is that the group formed to make the buyout would offer X amount of money to Dell's shareholders and board of directors. That amount would most likely be at a premium to Dell's share price, or at least a premium to the company's fair value as speculators jack up the share price in anticipation of this deal.

If the board approves, it would be sent to Dell's shareholders, and if they approve it would be subject to various bits of regulatory scrutiny. Depending on the premium offered, the chances of shareholders not approving is next to nothing.

Still, the money has to come from somewhere. Microsoft has tons of it, and just as Big Redmond took the opportunity to put $150 million into Apple when Steve Jobs needed a cash infusion in 1997, Microsoft reportedly sees an opportunity in playing a role in taking Dell private.

The Wall Street Journal reported that Microsoft could invest between $1 and $3 billion in the effort. That amount would leave Microsoft as a minority partner in the deal, and shouldn't be seen as Microsoft wanting to buy a hardware maker so it can make more of its own devices.

It's more likely to be an investment play by Microsoft than a strategic move related to its Windows, Windows 8 for tablets, or Windows Phone business.

That said, Microsoft could find it beneficial to have close ties to an enormous hardware maker not burdened by the requirement of reporting its every move to the public in the form of quarterly reports and SEC filings.

Microsoft runs the risk of annoying its PC OEM licensees, but the company has shown it's willing to take that risk by releasing its own Surface tablets.