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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.'"
Obvious first idea.
The name is bonds... Microsoft Bonds.
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German software company SAP appears to be a possible target.
8 Billion to buy Sun out from under Oracle.
The rest for the antitrust lawsuits.
If I were God, wouldn't I protect my churches from acts of me?
Maybe they want to buy GM?
While it may be true that they just want to buy something big (like politicians, judges, executive-branch officers) what if they merely wanted to show that they had X amount in debt for some other reason like taxes or some such thing?
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,
The Bonds will fund refunds for Vista, and Windows 7 from consumers who want to downgrade to XP, or upgrade to Ubuntu.
They're moving off planet to avoid problems with anti-trust regulation. Also, chairs thrown from the moon will have much greater impact on earth based targets.
$25 billion seems like a lot, but it used to be more than that.
The important thing to note here is the trend, not the current value.
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...
Because debt is really cheap right now.
http://www.geoffreylandis.com
No company sits on cash. They don't put it under a mattress. They invest it. If they are making 5% more in investing than the bonds cost, then why not borrow to invest? I've seen other huge companies borrow to invest, and there are whole classes of scam-sounding TV commercials about get rich quick with nothing down that are exactly that.
Other than that, there is no real reason to raise capital, unless they had an accountant that made them bid for cash against the investment opportunity and some $4 billion project decided to just borrow externally rather than get charged against a higher rate for taking internal money. But that's internal mumbo jumbo that just goes back to the initial point above, where it's being borrowed because the cost of bonds is lower than using the warchest. There exists nothing that could tap the entire cash reserve in a reasonably short enough time to justify bonds at this point unless they were buying Bolivia or something.
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Microsoft has a AAA rating. At this point in time, people are desperate for a safe place to park their money. Interest rates are low. Simply by holding onto it in cash now, they're betting they can make back the interest plus some later. And if deflation occurs, woo-hoo!
It'd be foolish not to borrow money given how cheap it is now, and how it's not likely to last at that level.
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Microsoft is becoming a mature company and they are operating like one. The will use this money to repurchase their own stock while it is at a discount. They will then keep the dividends on the stock for the company. This will continue until the stock price gets high again. They will then resell the stock for a profit and resources when they need it.
Yes, I am a trader.
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%.
The article claims MSFT is sitting on $25 million in cash. This is frankly false. What MSFT is sitting on is $25 million in "Cash and Short Term Savings." In short, a combination of Cash and Stock prices, which are not being adjusted as the companies values go up and down, and do not need to be adjusted to actual street value at the present time. What they do have is $8 billion in cash on hand, down from $12 billion a year prior (as of latest SEC filing in March). If I'd lost 1/3rd of my cash in less than a year, I'd be doing a bond right now as well.
Karma Whoring for Fun and Profit.
I'm guessing that Microsoft has about 4 dozen guys that know so much about finance, they would literally make you slit your wrists should you ever be matched up against them in a test of financial knowledge. Maybe, just maybe, they know what they're doing more than some random dude Slashdotting from work.
You know what else is cheap right now? Microsoft stock. Compared to last year, anyway (it's down a third)... and possibly compared to next year? They could invest in themselves: buy back company stock now while debt is N%, possibly leaving the (remaining) shareholders with a more-than-N-% return several years down the line when their stock rises due to other reasons.
The World Wide Web is dying. Soon, we shall have only the Internet.
No, any bond broker should carry them. E*Trade has some for offer right now. And you don't need "many thousands". You do need one thousand, though, as bonds are typically sold with a face value of $1000.
The why of this is fairly straightforward from a financial standpoint. Companies can raise money from two sources: Equity and debt. The cost of debt is obvious (the interest rate). The cost of equity is less obvious but very real: Investors demand a particular total rate of return on the money they invest in a stock, either in the form of dividend payments or retained earnings (appreciation in the value of the stock). If the total rate of return from your stock is less than what the market demands (based on its perception of how risky you are), then your stock price will fall until the desired rate of return is met. Typical long-term total return from the stock market is 9-10%, and for a tech company most investors will want more because of the perceived risk.
Anyway, the point is that when interest rates are low, it's a lot cheaper to get money from debt markets than from equity markets. So the smart CFO will borrow money and use it to buy back (and retire) stock. If you're a shareholder you like this in net, because although the company now has debt to pay back (a liability which decreases the value of your shares), the positive impact on value from having fewer shares outstanding outweighs it. The only downside to this strategy is that interest on debt must be paid back on a defined schedule -- bond holders aren't willing to defer their payoff like equity investors are (and consequently bond investors make lower returns on average). GM is an object lesson in getting squeezed this way. Many tech companies avoid long-term debt as a result; they don't like the ongoing obligation. If anything this move by Microsoft signals to the market that they've become a stable business that is confident in its long-term ability to generate cash.
Actually, now is a great time to issue bonds. Interest rates are extremely low (particularly for well-rated bonds which MS bonds assuredly will be) so if they can expect even a modest return on the bonds, they'll do well.
My gut tells me that this is a hedge against inflation, not a cash-raising effort for some diabolical plan.
On the other hand, this may be part of Gatus's effort to collaborate with Joba to create the One True OS with Global Web Search in order to stop Googol the Destroyer.
When last we saw our heroes they had embarked on their quest to stop Googol the Destroyer and his infernal plan to invoke the End of Days via the Rite of a Million Targeted Ads, but the rogue druid Stallmanx was hampering their efforts by biasing the common sorceror against them.
"Joba," the Oracle at Redwood Shores proclaimed, "You must harness the power of all the sorcerors of the land to stop Googol. Only by having them all contribute to the One True yada-yada can you stop Googol. I have spoken!"
And so Joba consulted with Gatus. "Gatus, how can we get all the other sorcerors to contribute? They don't like us, that bearded wretch Stallmanx has turned them all against us."
Gatus thought and thought, but in the end he resorted to his base nature... "I will buy the sorcerors we need! I'm short of cash though, I need another 5 billion. Maybe I could issue some bonds.".
Intrigued, Joba responded. "Yes, you can buy the greedy ones. I can use my powers of seduction and envy to make them all want to be like me. Yes, I will subvert the Ministers of Fashion to convert the low self-esteem rabble to our cause."
And so Gatus and Joba began to plan.
Meanwhile, the crack team of evil underlords at Google were busy with their database of potential ways for the world to be saved, and developing their counter-strategies. The acolytes of Googol the Destroyer were busily releasing the Webcrawling Spiders of Damnation upon the world, to catch information to sacrifice to their terrible leader, who devoured data with great appetite and gobsmacking satisfaction.
But Stallmanx is quiet... what is he working on in his secret laboratory? What nefarious ritual is he preparing to thwart our heroes? Will Joba and Gatus be able to overcome his resistance? Will we ever find out what wonders lie beneath the surface of Stallmanx's Beard of Druidic Prowess? Can Googol the Destroyer be thwarted?
Tune in to next week's episode of Google the Destroyer!
"Trolls they were, but filled with the evil will of their master: a fell race..." -- J.R.R. Tolkien on Olog-hai
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.
Apple made Microsoft a present: One iPod for every Microsoft employee. $3.8 bn is the money that Microsoft needs now to fill these iPods with music :-)
Yes I do hate Jesus, that son of a bitch hasn't shown up for work for 2000 years now..
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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I'm guessing that Microsoft has about 4 dozen guys that know so much about finance, they know what they're doing more than some random dude Slashdotting from work.
Unlike Microsoft's marketing department...
Microsoft is currently working on a $40B stock buy back, having recently completed ANOTHER $40B stock buy back. That's the amusing thing about the people who say that Apple is getting bigger than MS, based purely on cash in hand. Yes, MSFT "only" has $25B cash. That's after buying back $80B of stock.
MS is just getting enough cash to run a round of 2 million "Laptop Hunters" commercials.
"We told everybody in the state of New Mexico, you find a laptop for under $2000, you keep it."
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MSFT can make more money investing its existing cash. Its the same kind of trade off an individual may make: Do I invest my money? Or pay down my mortgage? if you mortgage rate is very low, then it makes more sense to invest your cash.
Jibe!
No matter how smart an individual man is, you get them into groups and they can collectively do a lot of stupid things. I mean, Microsoft also though that Microsoft Bob was a good idea.
My blog. Good stuff (when I remember to update it). Read it.
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'm guessing that Microsoft has about 4 dozen guys that know so much about finance, they would literally make you slit your wrists should you ever be matched up against them in a test of financial knowledge. Maybe, just maybe, they know what they're doing more than some random dude Slashdotting from work.
You could have said the same thing about Enron ten years ago. :)
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This Mahdi took Shaddam's Throne
Hookers and blackjack.
Mit der Dummheit kämpfen Götter selbst vergebens
Just so you know, big business corporations are run by ordinary people like the old monarchies were run by ordinary people. There is no difference between kings and CEOs, archdukes and VPs, and the boardroom and the royal court, except that passing of the crown isn't automatically done from father to son. The King appoints people, based on connections instead of merit. They all vote themselves raises, work their serfs as hard as they can, and every once in a while a new fiefdom is formed that turns into pretty much the same structure. It's more just than a straight monarchy, but it's really not that different.
I hope that we shall crush in its birth the aristocracy of our monied corporations, which dare already to challenge our government to a trial of strength, and bid defiance to the laws of our country.
-Thomas Jefferson, Bedwetting Liberal
The same thing has been true since the beginning of time. When people pass on wealth to their descendants, you end up with a bunch of rich, clueless, greedy idiots running the show, who never serve but send people to war, who never starve but lobby for the destruction of welfare, and who never work but demand the end of Social Security.
Inevitably, the disparity of wealth and the skewed use of a nations resources to attend to the "needs" of these Hapsburg inbreds leads to a revolution, and then whole process is repeated. Corporations just allow us to pretend there isn't a monarchy. The fact that they are run by people doesn't prove anything.
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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