Microsoft will probably sell bonds for the first time to finance its proposed $44.6 billion takeover of Yahoo, offering a top-rated investment...
Microsoft will probably sell bonds for the first time to finance its proposed $44.6 billion takeover of Yahoo, offering a top-rated investment in a newcomer to the debt markets.
The world’s largest software maker will use cash and stock to pay part of the $31 a share it has bid for Yahoo in the biggest technology takeover.
It will raise the rest in a debt sale, Chief Financial Officer Chris Liddell told analysts Monday at a New York investor conference.
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He didn’t say how much would be borrowed.
A Microsoft bond may attain the highest AAA rating, according to James Crandall, head of syndication at Calyon New York.
He compared the maker of the Windows operating system with General Electric Capital, last year’s most prolific borrower, and Warren Buffett’s Berkshire Hathaway.
Triple A rating
“With an entity like this, you’re flirting with a Triple A,” he said. “How they handle the merger will dictate the view the market has of the credit.”
A Microsoft bond maturing in 2018 may yield about 1.60 to 1.70 percentage points more than a U.S. Treasury security of the same maturity, Crandall said.
That would be a total yield of 5.2 percent to 5.3 percent, based on current Treasury prices.
Microsoft had $21.1 billion in cash and short-term investments as of Dec. 31.
“Given the visibility of their cash flow, they’ll probably get a low rate,” said Brendan Barnicle, an analyst at Pacific Crest Securities in Portland, who advises investors to buy Microsoft shares.
“You can’t find many companies with more stable cash flow than Microsoft,” Barnicle said.
Microsoft’s cash pile peaked at $60.6 billion in the fiscal year that ended June 30, 2004, weeks before it announced a $3-a-share one-time dividend on top of a regular dividend increase and a $30 billion four-year share-repurchase plan.
By May 2006, with the $30 billion buyback allotment almost finished and almost $35 billion in cash still on the books, some shareholders demanded a buyback of $60 billion or more to be funded by cash and debt.
That July, Microsoft announced a $20 billion regular repurchase program over five years combined with a one-time $20 billion tender offer for its shares.
The tender offer was undersubscribed, so Microsoft boosted the regular buyback.
Microsoft is one of 27 members of the Standard & Poor’s 500 index with no bond debt of its own, according to Bloomberg data.
More than half of the 27 are technology companies, including Google, Apple and Texas Instruments.
The average bond issued by technology and electronics companies is rated A3, Merrill Lynch & Co. index data show.
Oracle raised $3.5 billion in January 2006 in its first sale of corporate bonds in nine years. A month later, Cisco Systems sold $6.5 billion of debt in its inaugural offering.
Demand for Microsoft debt could be high.
“You’ve got this tremendous cash-flow machine,” said Tom Atteberry, who manages $2.8 billion of fixed-income assets at First Pacific Advisors in Los Angeles. “I’ll take a serious look at it.”
“It’s a new name, it’s not in finance,” said Wilmer Stith, who manages about $3 billion of fixed-income assets at MTB Investment Advisors in Baltimore and who may consider buying Microsoft debt. “It should be met with good demand.”
He said the bonds may be rated AA- or higher.
Even with high debt ratings, Microsoft will still probably have to a pay a new-issue concession like other borrowers because of “skittishness” in credit markets, Stith said.
Yahoo’s board of directors hasn’t responded to the takeover offer, with the company saying directors will take their time.
“We trust the Yahoo board and the Yahoo shareholders will join with us quickly in deciding to move down an integrated path,” Microsoft Chief Executive Steve Ballmer said at Monday’s conference.