Microsoft’s $2 Billion Loan to Dell: What Do They Get In Return?

Well, Microsoft is not exactly lending $2 billion to Dell directly. Rather, it is financing the bid put forth by Michael Dell and Silver Lake Partners to buy out the company. The $2 billion loan is part of the $24.4 billion bid made by Dell and co. which is more or less in the clear. Yet, one has to keep in mind that $2 billion is not a small amount by any stretch of the imagination, even for an industry giant like Microsoft. So, the thought naturally ventures towards what does Microsoft get in return for the loan.

Currently, Michael Dell and his partners are the only serious bidders left in the running after Blackstone Group withdrew its offer. This means that it is almost a done deal that founder Michael Dell will retain ownership and control of his company. His vision is to transform the service offerings of the company. From being a leading PC vendor, he wants to turn the company’s focus towards enterprise-level services and software, including cloud management.

Coming back to Microsoft’s loan, the company wants Dell to renegotiate the existing agreements already in place between the two companies. This would mean a significant change in the terms of payment currently outlined in the contracts. This clause is part of the filing Microsoft made to the Securities and Exchange Commission (SEC). The change in terms of payment could affect Dell’s status as a Windows OEM considerably.

Generally, a standard agreement between the maker and OEM is for the purpose of informing them about the licensing terms and conditions that are applied to the equipment being bought or sold. Among the points listed in the terms and conditions is the payment rate. The rate of payment varies from contract to contract, but is usually based upon the number of licenses a vendor agrees to purchase. In some cases, there are a minimum number of licenses the vendor is compelled to buy.

For Microsoft, this means they can influence Dell to pay a better price for the Windows licenses. Also, they have the leverage to sell more of their licenses through Dell rather than other OEMs like Lenovo and HP. So, Microsoft has a lot to gain from its transactions with Dell based on its $2 billion loan. At the same time though, Dell does have some power too. Dell can push Microsoft towards favorable terms for trading in the future or else simply reject the loan.

Regardless of how the deal goes down, there is no doubt that other PC makers dealing with Microsoft might suffer as a result. They won’t be able to offer the kind of prices made possible to Dell because of their agreement and it is also probable that Dell might be able to secure more licenses than any other seller. Still, the ball is in Microsoft’s court, given that the company is providing the cash needed to back the bid and for Michael Dell and group to complete the takeover.

It remains to be seen how many strings Microsoft attaches to the loan. One cannot ignore the fact that Microsoft can have a stake in Dell’s ownership in the future.

[Image via gadgets.ndtv]