Microsoft Eyes Debt Sale to Finance Yahoo Bid

Finance Students following Microsoft's intended acquisition of Yahoo might find this interesting if you've ever... "wondered why Microsoft sits on the pile of cash. It doesn’t make a lot of financial sense.”

The New York Times
February 5, 2008

Microsoft said on Monday it might borrow money for the first time in its history to fund a portion of its $44.6 billion unsolicited offer for Yahoo.

Microsoft’s chief financial officer, Chris Liddell, said the software company might issue some debt to finance the cash portion of its 50-50 stock and cash offer for Yahoo, instead of drawing down its entire $21 billion cash pile.

“It’s likely we’re actually going to borrow for the first time,” Mr. Liddell said in an annual strategy meeting with analysts. “It’s going to be a mixture of the cash we have on hand plus debt.”

Mr. Liddell declined to say whether Microsoft was already buying Yahoo stock on the open market. He also did not give any information on what form of debt Microsoft will seek in the capital markets.

Microsoft may attain the highest AAA rating, James Crandall, head of syndication at Calyon New York, told Bloomberg News. A Microsoft bond maturing in 2018 might yield 1.60 to 1.70 percentage points more than a United States Treasury security of the same maturity, Mr. Crandall told Bloomberg.

That would be a total yield of 5.2 percent to 5.3 percent, based on current Treasury prices.
Analysts applauded Microsoft’s decision to take on debt.

“Microsoft can probably get a lower price of debt than equity,” said Kim Caughey, senior analyst at the Fort Pitt Capital Group. “I’ve often wondered why Microsoft sits on the pile of cash. It doesn’t make a lot of financial sense.”

Mr. Liddell, when asked why Microsoft chose to dilute its stock instead of making an all-cash offer, said analysts need to keep the offer in perspective with the $31 billion that Microsoft spent in share buybacks and dividends in fiscal 2007.

Microsoft shares fell 26 cents to $30.19 in Nasdaq trading, while Yahoo shares rose 95 cents to $29.33.