Microsoft's $2 billion Dell loan comes with strings attached
As part of Microsoft's loan of $2 billion to a group trying to buy PC maker Dell, the two companies must modify the payment terms of Dell's current agreements with Microsoft, a document filed with U.S. regulators said.
CEO and founder Michael Dell and private-equity firm Silver Lake Partners have proposed to buy Dell for $24.4 billion, a move they said would allow the then-private firm to accelerate its transformation from PC seller to a vendor pushing higher-margin software and services to enterprises.
But the $2 billion from the Redmond, Wash. developer apparently comes with some strings.
Prior to the buyout's conclusion, Microsoft and Dell must "negotiate in good faith and enter into, as soon as reasonably practical" one or more agreements "to modify, alter or amend ... the standard terms for payment under the existing commercial agreements between [Microsoft and Dell]," the securities purchase agreement filed March 29 with the U.S. Securities and Exchange Commission (SEC) stated.
The changes will includes ones to the master OEM relationship agreements between the two firms, the document added.
A master OEM agreement is an umbrella agreement that spells out the software licensing terms between a developer and an OEM, reseller or customer. Those agreements typically include payment rates—which may vary depending on the number of licenses purchased—and may include minimum quantities that the OEM, reseller or customer commits to buy.
Details were not included in the filing with the SEC, and the securities purchase agreement gave no hint which party the payment changes would benefit: Microsoft, which has leverage from the $2 billion loan, or Dell, which could threaten to deemphasize PCs and Windows unless it was given a break.
"Payment terms" usually refers to the time a buyer has to pay the seller, but those terms often include discounts for early payment or to prod the buyer in directions the seller desires.
What it could mean
If Dell is able to win most-favored status through the changes, analysts have said other OEMs, such as the world's top two, HP and Lenovo, may fear they're getting shortchanged, and rethink their plans for Windows.
Or the modifications could be wider-sweeping—the mention of the master OEM agreement hints at such—to formalize what one analyst said was a likely "gentleman's agreement" between the companies.
In early February, when Dell announced the buyout plan, Patrick Moorhead, principal analyst with Moor Insights & Strategy, speculated that Microsoft's $2 billion contribution was contingent on Dell stepping up its use of Microsoft's products, or promising not to dabble in alternative operating systems, such as Google's Chrome OS.
Such an agreement could have been driven by Microsoft's fear that a privatized Dell would abandon the traditional PC market, said Moorhead, noting that Microsoft would rather have several strong OEM partners rather than just one or two.
Other possibilities include Microsoft pressuring Dell to pledge support for Windows RT, the tablet-only operating system launched last October. In fact, Dell recently backed Windows RT, one of the few OEMs to do so, saying it remained committed to the OS despite its shaky start and the plunging prices of tablets.
Previously, Microsoft has declined to discuss details of the $2 billion loan or answer questions about the deal. In February, the company issued a statement saying, "Microsoft is committed to the long term success of the entire PC ecosystem and invests heavily in a variety of ways to build that ecosystem for the future. We will continue to look for opportunities to support partners who are committed to innovating and driving business for their devices and services built on the Microsoft platform."
Assuming Michael Dell and Silver Lake buy Dell, the company would certainly stay in the tablet market, including those running Windows.
Reports submitted to Dell's board of directors by the Boston Consulting Group, a management consulting firm the board asked to help it evaluate the buyout offer, built their forecasts on the assumption that while Dell would continue to lose share in global PC sales, it should be able to generate revenue of $1.1 billion in fiscal 2016 by grabbing 9% of the U.S. Windows tablet market, and 4.5% of the emerging markets' share.
Microsoft's $2 billion—which will purchase notes issued by Dell that pay 7.35% in interest—played a crucial role in the buyout plan, according to other filings with the SEC. Late last year, Silver Lake threatened to bow out of the deal unless it was allowed to talk to Microsoft about chipping in. In less than two weeks, Microsoft's board gave the go-ahead to invest $2 billion.
Silver Lake and Microsoft have a history of working together. In 2011, the private equity firm brokered the sale of Skype to Microsoft for $8.5 billion, and that same year made a failed bid for Yahoo that reportedly included Microsoft as one of several partners.
More information about the agreements between Microsoft and Dell may come to light in later SEC filings either as the deal nears execution or when it's finalized, assuming stockholders agree to the buyout.
The date of the stockholder vote has not been set. Last Thursday, Dell submitted a preliminary notice of the meeting, but the date and time were left blank.