The Power of Minority Interest: Microsoft’s Interest in Dell

Although I deal primarily with mergers and acquisitions, acquisition is simply one pathway to external growth and should be considered in a broader context. One of the pathways to external growth to consider is minority interest ownership.

Microsoft’s proposed buyout of Dell demonstrates many of the benefits of minority interest ownership, a surprisingly neglected tactic.

An instinctive objection arises when we raise the possibility of minority interest purchases with clients: ‘‘But we want to control the company we are buying.’’ They think of minority ownership as a kind of passive investment where you effectively have no decision power over what happens.

In reality, you can often have your cake and eat it: You can purchase a minority interest and exercise as much control as is needed to achieve your goals. If there are specific results you are seeking from an acquisition, you can have these written into your minority purchase agreement.

Take a look at Microsoft’s potential buyout of Dell. Microsoft likely sees Dell as a key component to achieving its goals.  Dell has long been a supporter of Windows products and its success is an important part of Microsoft’s strategy to promote the use of Windows software, especially Windows 8. This deal, according to Yahoo Finance, would allow Microsoft software to power the majority of Dell devices and give Microsoft influence over Dell’s future strategy and use of Windows products.

There is another way you can indirectly, but powerfully, exercise control. Build into the agreement the option for purchasing further shares or a complete buyout, and make this option contingent on performance conditions that you set.

Walmart uses this strategy extensively. It will buy 30 percent of a manufacturer in China, for example, with an option to purchase the remaining 70 percent when the manufacturer has reached certain production targets. Walmart might stipulate some quite mundane but essential ingredients like getting the factories up to fire code. That way, Walmart doesn’t have to manage a difficult situation in an alien territory: It can step in and complete the purchase when the target has evolved to a ‘‘Walmart-friendly’’ condition.

Minority ownership is one tactic to growth that you should give special attention to—either as an end in itself or as part of a broader thrust for acquisition.

Photo Credit: Robert Scoble via Compfight cc