The much anticipated future of Dell Inc. (NASDAQ:DELL) has finally been announced: the company will be taken private by Michael Dell and Silver Lake Partners for $24.4 billion via a leveraged buyout deal which includes $2 billion in loans from Microsoft Corporation (NASDAQ:MSFT) and $15 billion in extra debt from several banks.
The move makes sense when it comes to earning time to save the company, as a private business Dell will be sheltered from market pressure. Without having the obligation to deliver results on a quarterly basis in order to constantly reassure investors, management can focus on transforming the business and finding a more profitable long term path.
Dell has been trying to move away from the hardware business into more profitable areas like software and cloud computing for a long time now: the company has spent more than $13 billion in acquisitions since 2008. But the business is still too dependent on the declining PC industry, so the last years have been quite dismal for the company and its shareholders.
A turnaround won’t be easy, but Michael Dell and his partners could earn a lot of money if things work out as expected and they bring the company back to the stock market in a much better shape five or ten years from now. As for the banks, they are in the lending business, and they probably think the deal is a good one from that perspective. When it comes to Microsoft Corporation (NASDAQ:MSFT), however, things are much more confusing.
Not the first time
In 2011 Microsoft made an agreement with Nokia Corporation (ADR) (NYSE:NOK) that includes $250 billion per quarter in exchange for having Windows as Nokia’s main operating system in the Lumia line. Nokia is paying an undisclosed amount in royalties for every sale back to Microsoft Corporation (NASDAQ:MSFT).
According to Nokia:
“Over the life of the agreement the total amount of the platform support payments is expected to slightly exceed the total amount of the minimum software royalty commitment payments .To date the amount of platform support payments received by Nokia has exceeded the amount of minimum royalty commitment payments to Microsoft. Thus for the remainder of the life of the agreement the total amount of the minimum software royalty commitment payments are expected to exceed the total amount of the platform support payments.”
This means that from now on Microsoft Corporation (NASDAQ:MSFT) will see positive cash flow form the agreement until it ends, but that doesn’t mean that Lumia sales have been booming. The statement indicates that there is a floor to these royalties – minimum software royalty– so the fact that Microsoft Corporation (NASDAQ:MSFT) is seeing net inflows from the deal over the next months doesn’t say much about its commercial success.