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Microsoft defends frayed PC ecosystem with $2 billion Dell loan

Posted by | February 6, 2013 .

SEATTLE/SAN FRANCISCO (Reuters) – Microsoft Corp is playing defense with a $2 billion loan to help Dell Inc’s founder buy back the world’s No.3 PC maker as it seeks to shore up support for Windows and beat back the march of Google Inc’s Android.

The investment in the landmark $24 billion buyout led by Michael Dell marks the latest step in Microsoft’s plan to gain more influence over the hardware supply chain – a departure from the decades-old, software-centric philosophy that helped it dominate the computing world but is now increasingly under threat.

It is far from clear, however, if this strategy will be successful, while the world’s largest software maker risks upsetting other computer producers.

”It doesn’t mean it’s a bad move, but it’s definitely defensive. Microsoft is realizing it must be much more engaged in the hardware business than it used to be, it needs to be making bets and forming relationships,” said Andrew Bartels, an analyst at Forrester Research.

The company that built its fortune on making high-priced software to go in other companies’ computers is inching closer to Apple Inc’s belief that software and hardware must be closely integrated for the sake of the user experience.

Microsoft struck a deal to pay Nokia to make phones running Windows software in 2011 and a year later invested in Barnes & Noble’s Nook e-reader. It then launched its own computer, the Surface tablet, in October, which rankled some PC makers initially.

In the face of declining PC sales and the onslaught of Apple’s iPad, ”Microsoft has taken more unconventional measures than they would have in the past,” said Sid Parakh, an analyst at investment firm McAdams Wright Ragen.

This time, Microsoft made extra efforts not to alienate its other PC makers, talking to them before inking the deal, said sources familiar with Microsoft’s relations with its partners, and holding off from an ownership stake.

”Microsoft reached out (at the highest levels) a bit before all of it came out,” one of the people said. ”There were multiple conversations. Clearly they put some thought into it and definitely a schedule was pulled together.”

Even so, world No.1 PC maker Hewlett-Packard Co (HP) issued a statement critical of the deal.

Dell ”faces an extended period of uncertainty and transition that will not be good for its customers,” HP said, adding that Dell’s ability to invest in products and services will be extremely limited with its debt load.

Lenovo Group Ltd said it remains focused on products and customers rather than ”distracting financial maneuvers and major strategic shifts.”

Microsoft, advised by Lazard Ltd, declined to comment on the terms of the Dell loan, or what exactly it gets in return, but made it clear it would look for ”opportunities to support” companies that buy in to Windows, in whatever form. That suggests this may not be its last third-party investment.

Still, there is no guarantee that Microsoft’s loan will give it any sway over Dell at all. One former Microsoft executive said the deal was pointless.

”I know Michael (Dell), he will continue to run his empire the way he has always done – without any outside influence,” said Joachim Kempin, once Microsoft’s top executive in charge of its relationships with PC makers, who left the company in 2002.

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