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Microsoft Raises $3.8B in Bond Sale
pfleming writes "Microsoft quietly, or not so quietly, raised some cheap cash in bond sales yesterday. For a company that already has a huge cash war chest and doesn't carry debt, what is the incentive to sell nearly $4 billion in bonds? From the article: 'Microsoft is sitting on $25 billion in cash, so the company doesn't need the bond proceeds "unless they have something big in mind," says Reena Aggarwal, professor of finance at Georgetown University's McDonough School of Business.'"
It may be that they're hedging their bets against a possible dry spell in their business. Better to get the cash now, while their bond rating is good and they can get a low interest rate, than trying to issue bonds when they're not looking so hot.
Of course, they may also be starting their business model conversion, a la Control Data Corporation. The software monopoly may not last forever, after all, and this is a cheap way to hedge their bets.
Lacking <sarcasm> tags,
At least, the companies I've all worked for have all done business in this manner:
Have a fairly large cash reserve which is your 'emergency' fund. When you need to aquire a company or other such big ticket item, borrow. Even if you have the cash, investors consider how you are leveraging your credit when looking at whether to buy your stock and being under leveraged is just as bad as being over leveraged (cause you are letting money that could work for you just sit idle, stunting your earnings).
and raising money via debt is the cheapest way to run a company. every project has a cost of capital usually calculated by the direct monetary cost, estimated returns, etc.
debt with it's low interest rates is the cheapest
retained earnings or cash in the bank is more expensive because investors expect growing earnings
selling stock is the most expensive due to expected returns
a lot of companies like GE have borrowed at short term rates and simply rerolled the debt every time it matured paying low rates. nice until 2008 and GE's rates shot up to almost 10%.
Microsoft does not want to spend its cash hoard of $25 billion when the interest rate on bonds is essentially at zero -- relative to inflation.
Given ALL the problems we see with corporations that carry debt, why on earth Microsoft would want to piss away a giant cash reserve AND borrow money ...?
Perhaps they're expecting significant inflation, or even hyperinflation, of dollars (as is everybody with the least clue about the theories of the Austrian school of economics.)
Interest rates are massively depressed by the "printing press money" currently pouring out of Washington. The expectation that the money will devalue drastically over the next couple quarters to couple years (especially now that China has stopped buying US bonds). Meanwhile the artificially depressed (compared to borrowing only savings) interest rates continue the diversion of "stuff" from where it can build infrastructure to make a future profit and into either projects that can't be finished or won't have customers when they're done or immediate consumption. This turns a recession into a depression. It's exactly what happened to create the Great Depression, but the government is doing it more this time around and with no safety net from a gold standard - so the US could end up more like Weimar Germany than the US of the '30s.
If you believe that, the logical thing to do is to grab some of the dollars at the low interest rate before the inflation gets figured into their price and use them to buy assets that won't inflate or disintegrate in a depression. Pick off undervalued resources - commodities, potentially profitable companies, etc. Then when the inflation hits, cash things like your gold reserves and pay off the notes in inflated dollars.
To give you an idea of what hyperinflation is like: In the first year and a half after the Treaty of Versaille's reparation section took effect, the money inflated so much that, were it to happen here, a $200,000 mortgage could be paid off completely for the price of a slice of toast. (Over 9 years it inflated by a trillion-to-one, before they instituted a new money that was more solidly backed.)
= = =
Then again:
- Maybe they see an acquisition target and need a bit more cash.
- Maybe they ARE, or expect to become, an acquisition target (due to the cash reserves and an expectation of a stock price drop) and are working on looking less attractive. B-)
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Some relevant numbers:
Yahoo Market Cap: $21B
Current Microsoft cash reserves: $24B
Last MS offer for Yahoo: $44B
Against numbers like these, it's difficult to see how Microsoft having, or not having, an extra $3B, would make any difference. Either way, they'd have to borrow at least half of the purchase price.
I suspect that the Microsoft CFO is just playing the usually games that CFOs play. These guys are always shifting money around. When you've got that much cash, you can't just leave it in a bank account — even minor tweaks in the way you stash it can save you (or cost you) millions.
One possibility: they're borrowing money at a low interest rate in order to retire debts that are carrying a higher interest rate.
Assuming share repurchasing is really the intent here, and that's not a bad guess, let me offer a contrarian view to your rosy perspective to MSFT's move.
By borrowing dollars in the bond market to fund a share buyback, MSFT's board is effectively using borrowed money to place a wager that the market is currently undervaluing MSFT's stock. By choosing to throw their extra cash, along with borrowed dollars, at this share buyback scheme, MSFT is betting that they can predict the future better than the market.
What would be really great is if someone had done a study of the effect of share buybacks undertaken by S&P 500 companies, to test whether they work at all. Oh wait, S&P itself has. If you're a MSFT shareholder, ask yourself whether MSFT should be using their extra cash to pay dividends instead of embarking on harebrained schemes like this. Actually, I take that back -- you'd probably prefer they spend money buying back their own shares and paying bond interest rather than flushing it down the Zune toilet.
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I agree; rumors are abounding that Microsoft will release the Zune Phone this year. Apple sold almost 4.5 million iPhones in the fourth quarter last year, compared with Microsoft selling about 6 million XBox 360's... it's a segment that Microsoft will not ignore any longer.
No doubt they will treat a Zune Phone like the original XBox... force the establishment of the brand by sinking an ungodly amount of money into the division, and hope to become profitable in succeeding generations of the device.
No, they don't "need" VMware themselves. They have a product which "fits" that niche - "that niche" being Windows desktop and server virtualization products (and only for MS's more expensive OS versions).
But if you consider the facts of VMware being cross-platform for both host and client OS, supporting a myriad more client operating systems than MS does, and the fact that VMware is working on emulation applications for mobile devices, well: the picture changes somewhat.
VMware is only competition in the very small world of Windows on Windows emulation. You have a significant diminished return on your hardware when your virtual hardware is sitting on top of a Microsoft OS: you need a lot more hardware.
Not only that, but VMware is heavily used in Linux by both companies and individuals. They offer the Only mature set of virtualization tools for OS X and Linux. Yes, Linux has KVM and Xen, and there's also Virtualbox - but Linux kernel virtualization lacks a cohesive, 'available' interface for management, and Virtualbox is easily several years behind even VMware workstation in terms of features, stability, and general solidness.
If MS were to buy VMware, they'd offer it as a move towards expanding their virtualization services to other OSes - to 'infuse' MS tech into VMware products to make them better. Then, the Windows versions of VMware products would slowly become much, much more "windowsy", while the Linux and Mac versions stagnate in features and usability - while useless or half-broken features are added, making the package as a whole less usable. Eventually, they'll be canceled outright.
That would be a very, very bad thing; after all, we IT folks are trying to move towards a more fully virtualized software/hardware environment: it makes things easier for us. Microsoft, on the other hand, has spent its entire existence making new hardware slow and glitchy with new OS releases. They want to maintain and perpetuate the status quo, which is a world of MS domination in every realm of a network's architecture.
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