Wednesday, June 9, 2010

Microsoft and Debt.

Here is a link to a good write up on MSFT's seemingly dumb debt issuance. I would argue that it is a good example of an MBA making an irrational decision, or, of some banker bribing someone in the company.

I wonder if Bill Gates knows about this, and furthermore, what he thinks of it since he has become friends with Warren Buffett.

A snip:
The software company will use the sales proceeds to repay short-term debt. If it was any other company I’d ignore this headline as a daily noise as this kind of things happens all the time. But Microsoft has $39 billion of cash and generates $16-$17 billion of free cash flows a year. Issuing short-term debt, for which Microsoft will surely pay higher interest than it receives on the pile of its cash makes absolutely no economic sense – zero.


Kapil said...

It could be done to maintain their WACC & debt-equity ratio . Or, they might be gearing up for a big acquisition and don't want to bring the dollars from offshore to avoid the tax. Cisco bought Tandberg specifically for that reason.

Saj Karsan said...

I totally agree, the issuance puzzles me profoundly.

I don't buy the inflation argument either, because if they believe in inflation, they are going to see a big depreciation in the value of their cash reserves as well, so they may as well use cash to pay off the debt.

The only value I see in issuing medium-term debt despite a large cash reserve is that the company can lock in favourable financing rates now, while allowing it flexibility to pursue a large acquisition (e.g. Yahoo, RIMM etc). However, in this case the debt issuance is so small relative to the cash balance, it should be of no help in that regard!

Puzzling to me!

Ankit Gupta said...

I thought I once read that it was done as a "worst case scenario" amount of cash in case we went into a depression economically. Ballmer had highlighted some company that issued debt prior to the great depression and was funding R&D at a time when no one else could and so when things turned around, they were able to sell innovative products no one else had.

This recent one is a bit confusing and so maybe they are still unsure about the economic climate?

Anonymous said...

the reason they do this is because they probably have cash sitting abroad and if they wanted to repatriate it they would have to pay taxes. given the cost of debt for MSFT right now issuing debt locally to raise cash locally is much much cheaper. many tech companies do this. CSCO did this not long ago