Microsoft risks straining PC partners with Dell investment

, Bloomberg

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Microsoft Corp., after straining ties with computer makers by releasing its own tablet computer last year, risks further fissures with partners by planning to make a strategic investment in Dell Inc.

Dell is close to clinching a leveraged buyout by Silver Lake Management, and Microsoft is discussing providing part of the funding, people with knowledge of the matter said Wednesday. Microsoft may contribute about $2 billion for the deal, which could be announced this week, one person said.

An investment would shore up a partner and help Microsoft gain influence in business computing as it loses ground with consumers gravitating toward competing tablets and smartphones. PC makers also may fret that the arrangement will give Dell an advantage, such as through an early look at new software, deeper insight into strategy or preference in product marketing and promotion. Microsoft became a competitor to hardware manufacturers with the release of the Surface tablet last year.

"If you're a vendor that wasn't happy with Surface, the idea of Microsoft owning part of Dell is not going to cheer you up," said Michael Gartenberg, an analyst at market-research firm Gartner Inc. "But if you're Microsoft and you feel you need to do more devices, and that hardware and software need to be more integrated, the ability to have major influence on a big PC vendor opens some interesting opportunities."

Frank Shaw, a spokesman for Redmond, Washington-based Microsoft, and David Frink, a spokesman for Round Rock, Texas- based Dell, declined to comment.

Surface Surprise

Microsoft, the world's largest software maker, tested ties to the PC industry last year when it unexpectedly announced plans to start selling the Surface. The tablet has gotten off to a disappointing start, and it's not yet clear how formidable a competitor Microsoft will be. Brent Thill, an analyst at UBS, halved his estimate for Surface sales, to 1 million units in the fiscal second quarter, which ended in December, citing "gloomy sentiment" after the holiday shopping season.

Still, it makes sense for cash-rich Microsoft to prop up a seller of PCs and tablets that feature its software. Both companies are struggling to mount a credible response to Apple and Google in the market for mobile computers.

Microsoft had $66.6 billion in cash and short-term investments at the end of September.

Dell, the third-largest PC maker, is just one of a handful of vendors selling a tablet with Windows RT, a version of Microsoft's Windows for chips based on ARM Holdings technology. Dell will also begin shipping a separate tablet using the flagship operating system, Windows 8, this month.

'World of Hurt'

Computer makers and Microsoft are facing a prolonged slump as PC shipments are forecast to drop for the second year in a row in 2013. They fell 4 percent in 2012 and will slide another 1.5 percent this year, according to estimates by JPMorgan Chase & Co. Tablet sales rose 72 percent last year and will surge 54 percent this year, JPMorgan forecast.

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