Microsoft Corporation (MSFT) Is Looking Desperate: Nokia Corporation (ADR) (NOK), Dell Inc. (DELL)

In 2012 Microsoft struck a joint venture with Barnes & Noble, Inc. (NYSE:BKS) that consisted in investing $300 million in exchange for 17.6% in a new company – they called it “NewCo” in the press release – and will carry on with the Nook e-reader business using Microsoft’s software. This was an attempt to enter the e-reader business, but Nook sales have not been very encouraging so far.

Both deals have a similar spirit; Microsoft invests in a troubled company with the aim of gaining a partner for its products and achieving critical mass in areas like smartphones and e-readers. This brings us to the Dell arrangement, which seems to be motivated by the same principle.

From Microsoft’s press release

“Microsoft has provided a $2 billion loan to the group that has proposed to take Dell private. 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”.

A marriage of necessity

Dell is the third PC manufacturer in the world behind Hewlett-Packard Company (NYSE:HPQ) and Lenovo, so it’s a relevant part of this ecosystem and certainly a big client for Microsoft.  This is not a marriage based on love but on necessity, and these kind of things don’t usually end well.

Microsoft is buying its clients, or lending them money, as opposed to seducing them with attractive products that deliver results at the point of sale. This can only extend the agony: unless the company builds innovative products clients want to buy – both in mobile and in desktop – there is really no point in spending money in this kind of deal.

The fact that Microsoft decided to participate via debt as opposed to equity has been a surprise for most analysts, Dan Primack from Fortune has the following explanation:

The software giant was worried about other customers thinking that Microsoft had incentive to value one over another, so it chose not to take an equity position.

But it still sounds like a really lousy deal. Microsoft is making a risky investment by lending money to a highly leveraged corporation, and the company doesn’t share the big upside potential that Michael Dell and Silver Lake will enjoy if the turnaround is successful. This sounds like a high risk low potential situation for Microsoft from a financial point of view.

Also, an equity investment could have given Microsoft some strategically valuable political power over the new Dell, but that is not the case under the current scenario.

Bottom line

This is a bad deal for Microsoft, both financially and strategically. If the company needs to lend money to its clients, this cannot be a good sign, so investors beware.

The article Microsoft Is Looking Desperate originally appeared on Fool.com and is written by Andrés Cardenal.

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