Dell's Cloud, Services Businesses May Interest Microsoft More Than PCs

Analysts suggest that Microsoft may be more interested in Dell's growing cloud and enterprise services portfolio than it is in its PC and server businesses.

Dell's bid to take the company private amid slackening PC demand hit new heights of industry scrutiny when it was reported that Microsoft was prepared to pitch in up to $3 billion for a leveraged buyout of the company. According to reports, Silver Lake Partners, a private equity firm, is spearheading the process.

Going private in a leveraged buyout would give Dell the flexibility to react faster to the dynamics of the IT market and reshape its business to suit changing market conditions, according to Rob Enderle, principal analyst with the Enderle Group.

When the news first broke, Enderle told eWEEK, "It allows the company to function with the agility of a startup and most of the resources of a large public company. In effect, if you are contemplating making some major structural changes to the company, this is like, in a car race, pulling the car off the track to do the heavy modifications, rather than trying to do those changes during a pit stop or while the car was actually racing."

Dell and Microsoft are both confronting the effects of diminishing PC sales. Last year, Dell's PC shipments tumbled 12.3 percent, according to market estimates from Gartner, with no turnaround in sight. Microsoft's big Windows 8 launch in October failed to spark a PC-buying frenzy, according to Gartner and IDC.

Microsoft, meanwhile, is weathering its own IT market headwinds.

Windows 8 sales, although brisk, can hardly be considered blockbuster. While the operating system rang up some healthy sales for the company's Windows division and contributed to record-breaking revenues last quarter, uncertainty persists.

A dearth of touch-enabled Windows 8 hardware, tepid demand for the Surface tablet—Microsoft did not offer Surface RT sales figures during a recent investor call—and strong enterprise adoption of Windows 7 are all contributing to cautious view of Windows 8's chances among IT analysts. Worse, Microsoft is gaining little ground in the booming tablet market.

A deal could bring both companies' strategies into closer alignment, perhaps even revitalize sales for both with a slate of PCs and tablets that leverage each other's strengths in hardware and software, respectively.

But don't get too hung up on PCs, industry watchers warn. Microsoft's interest in Dell could center on the latter's growing IT services portfolio.

In a Yahoo! Finance article, Marty Wolf wrote, "Next, for Microsoft, this deal is not material, but strategic. Microsoft has $66 billion in cash that is earning very little. For a few billion, Microsoft can get meaningful influence with one of its largest global partners."

"Dell's transition to services also creates other opportunities for Microsoft in the cloud, big data and virtualization — all areas that are part of Microsoft’s future in the enterprise space. Microsoft can theoretically end up with a services provider—not dissimilar to its relationship with Avanade in CRM," offered Wolf.

Enterprise software and services are among Microsoft's strongest—and growing—business units. Dell has been making big efforts to transform its business from a PC and server vendor into a provider of enterprise IT services.

In 2011, the company pledged $1 billion in an aggressive cloud-computing and virtualization push. Last summer, the company announced Dell Cloud Dedicated services that enable organizations to effectively float their own managed private clouds in the Dell’s cloud data center. In November, Dell acquired Gale Technologies for its infrastructure automation software.

Pedro Hernandez

Pedro Hernandez

Pedro Hernandez is a contributor to eWEEK and the IT Business Edge Network, the network for technology professionals. Previously, he served as a managing editor for the network of...