Tuesday, May 12, 2009

Microsoft’s Surprise $3.75 Billion Debt Offering

Times like those of a recession leave many companies in desperate need of liquidity to bolster their operations. But it came to my surprise this morning to notice that a powerhouse such as Microsoft Corporation (NASDAQ: MSFT) is issuing their first ever lot of corporate bonds.

In more details, the proposed offering of $3.75 billion senior unsecured notes is composed of five-year, 10-year and 30-year notes and are rated "AAA" by Standard & Poor’s Rating Services. In a press release, Microsoft said the offering would be divided as follows: there would be $2 billion of 2.95% notes due June 1, 2014; $1 billion of 4.20% notes due June 1, 2019 and $750 million of 5.20% notes due June 1, 2039. For a company that has generated a 52% return on average shareholder’s equity in a year as bad as 2008, that is pretty cheap financing.

A press release from the Microsoft Corporation says that the proceeds from the offering will be used for general corporate purposes, including funding for working capital, capital expenditures, share buybacks and potential future acquisitions.

The real move I can see here is probably that when the board of directors of Microsoft saw interest rates at such historically low levels in September 2008, they allowed the company to take on up to 6 billion in debt. It is a pretty good idea since the company has showed that it could generate very high returns for its shareholders at a very low price.

What I am not quite getting is that the company doesn’t really need the money. With 7 billion dollars in cash and 18 billion in short term investments that are very liquid, I wonder what an extra 3.75 billion would change in the investment strategy of the company to increase returns for shareholders.

Full Disclosure: The author does not have a position in MSFT.

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