Microsoft Announces Debt Offering

[HardOCP News]

Microsoft Corp. today announced the pricing of its offering of $4.75 billion of senior unsecured notes. The notes consist of the following tranches:

$1 billion of 0.875 percent notes due Sept. 25, 2013
$1.75 billion of 1.625 percent notes due Sept. 25, 2015
$1 billion of 3.000 percent notes due Oct. 1, 2020
$1 billion of 4.500 percent notes due Oct. 1, 2040

Microsoft intends to use the net proceeds from the offering for general corporate purposes, which may include funding for working capital, capital expenditures, repurchases of stock and acquisitions. The offering is expected to close on Sept. 27, 2010.

 

[Simpson5774]

So they are offering to give you a smaller amount of interest by buying up their debt then say putting it into a regular savings account or a CD?

 

[Auxon]

And why are they doing this? They have 36.5B in cash. I would call that excessive and beyond whatever needs their daily operations requires...

 

[Exavior]

And why are they doing this? They have 36.5B in cash. I would call that excessive and beyond whatever needs their daily operations requires...

That is the same thing that came to mind for me. Why do companies have debt but have billions and billions of cash on hand.

 

[RedShark]

They must think that whatever they are doing with this money (i.e. however they are using it) will result in a greater gain than these rates.

 

[Monkey God]

That is the same thing that came to mind for me. Why do companies have debt but have billions and billions of cash on hand.

Shell games to keep the tax man confused.

 

[The Red]

You're looking too deeply into the answer. The answer could be as simple as MS having a re-investment plan that pays higher interest than they'll have to pay you when your loan to them matures.

A 4.5% gain after 30 years might not be enough to stave off even inflation for you.

 

[Ryokurin]

That is the same thing that came to mind for me. Why do companies have debt but have billions and billions of cash on hand.

Because in Microsoft's case, most of the money is held overseas. If they brought it back to the US they would have to pay tax on it, so it's cheaper to sell bonds and slowly pay it off.

 

[cyclone3d]

So they are offering to give you a smaller amount of interest by buying up their debt then say putting it into a regular savings account or a CD?

This is primarily what came to mind when I saw this as well.

Microsoft is basically offereing to rip you off. I wonder how many people will bite.

 

[Chimel]

Even if most of the money is held overseas, they must have at least $10B cash in the US, which would be even cheaper to use than bonds. The US is still their biggest market, even if international sales globally are even bigger.
But of course, at these extremely low rates, it's basically free extra money.

 

[eon]

And why are they doing this? They have 36.5B in cash. I would call that excessive and beyond whatever needs their daily operations requires...

a better question would be why would anyone want to take on this offer? those rates are garbage
my credit union's standard savings rate is currently at about 1.3%, better than their 3 year loan. And before this downturn it was consistently over 2.5% and as high as 4%

 

[Sparkhard]

Isn't this similar to what DEC did in the 70s??? they didn't have the market share that MS has but still...

 

[BladeVenom]

Shell games to keep the tax man confused.

They're tax cheats. Something to remember when you're paying your taxes.

 

[STR]

That is the same thing that came to mind for me. Why do companies have debt but have billions and billions of cash on hand.

Let me put it this way: Say you owe somebody $1000. You have $1,000 right now (which you could pay with), but it's in an investment that's earning 10% interest. You don't want to give up that interest, it's an extra $100 a year you don't have to work to earn. Some other guy will offer you a loan of $1,000, but will charge you 5% interest on it.

What do yo do? Well...

If you take the money you already have out of the investment, you're basically loosing the $100 a year income.
If you borrow the money, you're going to be loosing $50 a year in interest.

Get it? You're $50 better off by borrowing.

 

[WBurchnall]

Shell games to keep the tax man confused.

Or shell games to ask the tax man for a tax break? I wonder if a company continuining to have a certain amount of debt per income ratio or debt per something else qualifies a company for a x% break on corporate taxes that result in more money saved from the tax break than spent on paying interest on that debt?

 

[WBurchnall]

Let me put it this way: Say you owe somebody $1000. You have $1,000 right now (which you could pay with), but it's in an investment that's earning 10% interest. You don't want to give up that interest, it's an extra $100 a year you don't have to work to earn. Some other guy will offer you a loan of $1,000, but will charge you 5% interest on it.

What do yo do? Well...

If you take the money you already have out of the investment, you're basically loosing the $100 a year income.
If you borrow the money, you're going to be loosing $50 a year in interest.

Get it? You're $50 better off by borrowing.

In a good economy, sure! In a bad economy, if your unlucky, you lose your investment capital in a voliatile stock market and are 1000 in debt at 5% interesting.

 

[jiminator]

or investor x, instead of collecting dividends can now choose the option to get a bond, maybe delaying a taxable event....

 

[meme]

So they are offering to give you a smaller amount of interest by buying up their debt then say putting it into a regular savings account or a CD?

If you have $100,000 to invest, you put it in a savings account or CD.

If you have $50,000,000 to invest, where are you going to put it? You don't want to leave it sitting in cash, because then it is earning no interest, plus you have to worry that someone might steal it.

However, any place that you put it will be a risk, because the bank might go under or the company might go under or whatever. So you look for a place to put it which earns you some level of interest but (perhaps) is as safe as reasonably possible.

With all the banks that have gone under in the last few years, Microsoft looks like a safer place to keep your money than a bank probably.

 

[BaldHeadedDork]

And why are they doing this? They have 36.5B in cash. I would call that excessive and beyond whatever needs their daily operations requires...

They must think that whatever they are doing with this money (i.e. however they are using it) will result in a greater gain than these rates.

If you have $100,000 to invest, you put it in a savings account or CD.

If you have $50,000,000 to invest, where are you going to put it? You don't want to leave it sitting in cash, because then it is earning no interest, plus you have to worry that someone might steal it.

However, any place that you put it will be a risk, because the bank might go under or the company might go under or whatever. So you look for a place to put it which earns you some level of interest but (perhaps) is as safe as reasonably possible.

With all the banks that have gone under in the last few years, Microsoft looks like a safer place to keep your money than a bank probably.

You're both close, but you're overthinking it.

Microsoft floated these bonds because they could. It's really not any more complicated than that.

Look at those rates. They got one billion dollars to use for the next three years, for less than 1%. Microsoft's $37b in cash isn't in cash - it's in investments of their own. If the yield on that is greater than they're paying in interest, they'll make money just using the money from these bonds to finance ongoing operations.

MSFT was able to get money at those rates because, as this piece from Motley Fool put it, the investing world is losing its mind. So much money is flowing into the capital markets looking for investments that it's pushing yields to stupid lows.

(Side note - The 4.5% on the 30-year bond is even more dumb than the 0.9% for three years. There's a much greater chance of zero or deflation over the next three years. Anyone want to make a bet on inflation averaging less than 4.5% annually for the next three decades?)

But inflation is far from the biggest risk for these buyers. It's very easy to lose money on bonds if you sell them before maturity, which a lot of investors do when they see a better investment somewhere else. When (not if) stocks become more appealing than bonds or the rate on Treasuries go up, the yield on new bonds will rise and anyone who owns these bonds will have to sell them at a discount to offer a competitive yield. This is what the MF writers are talking about when they say these buyers are going to get crushed by inflation or higher yields. The only question is which.

Shell games to keep the tax man confused.

Because in Microsoft's case, most of the money is held overseas. If they brought it back to the US they would have to pay tax on it, so it's cheaper to sell bonds and slowly pay it off.

I'm going to be polite and ask if you have anything to support this?

Okay, that's out of the way. Where money is held is irrelevant to the need to make a bond issue. Money is fungible. Companies that hold assets offshore (and as far as I know, MSFT isn't one of them) can move the needs for capital to where the money is.

 

[Ryokurin]

http://www.businessweek.com/news/2010-09-22/microsoft-plans-4-75-billion-4-part-bond-sale.html

Microsoft reported $36.8 billion in cash and short-term investments at the end of last quarter. Much of that is held overseas, forcing the company to pay taxes on any of the money used for dividends or stock repurchases.

The company boosted its quarterly dividend by 3 cents, or 23 percent, to 16 cents a share yesterday.

“This higher dividend, combined with our ongoing share repurchase program, reflects our commitment to returning capital to our shareholders and our confidence in the long-term growth of the company,” Microsoft Chief Financial Officer Peter Klein said yesterday in a statement.

and as far as supporting the notion of why would someone buy bonds from them.

http://www.bloomberg.com/news/2010-...stor-demand-for-top-rated-corporate-debt.html

Redmond, Washington-based Microsoft is one of only four non-financial U.S. companies with top credit ratings, making it attractive to institutional investors that are required to buy investment-grade debt, said Guy LeBas, a fixed-income strategist with Janney Montgomery Scott LLC. The others with the same AAA grade -- Automatic Data Processing, Johnson & Johnson and Exxon Mobil Corp. -- aren’t likely to issue bonds soon, LeBas said.

“There’s virtually no supply of that debt,” said LeBas, whose Philadelphia-based firm provides financial advisory services. Johnson & Johnson issued 30-year debt last month that’s tied with Microsoft for the lowest coupon.

 

[heatlesssun]

Do you think that rich people buy everything in cash? They wouldn't be rich if they did. There's lots of reasons to issue debt as mentioned already, from tax purposes to reinvestment strategies. At any rate does anyone think that they won't pay up? Of course they will and this is good investment for people needing a predictible and SAFE investment. That's why the rates are low.

 

[heatlesssun]

You're looking too deeply into the answer. The answer could be as simple as MS having a re-investment plan that pays higher interest than they'll have to pay you when your loan to them matures.

A 4.5% gain after 30 years might not be enough to stave off even inflation for you.

4.5% ain't bad right now. That's a higher rate than I'm paying on my mortage right now.

 

[a123456]

Microsoft floated these bonds because they could. It's really not any more complicated than that.

This and this some more. Microsoft is one of the very very few AAA companies left. They can pretty much almost match treasury rates and people will buy their bonds for the safety. It's a great time to get cheap money for them.

As for what they'll do with the money, who knows? But this announcement is on the heels of their raising their dividend to give a 2.1% yield. They're not growing that fast anymore, so instead they're enticing shareholders with dividends.

They could also use the money to buy up a lot of smaller companies. Using cash/debt would make sense for them since they can afford it and they don't want to dilute their shares any more than they have to.

I'm going to be polite and ask if you have anything to support this?

Okay, that's out of the way. Where money is held is irrelevant to the need to make a bond issue. Money is fungible. Companies that hold assets offshore (and as far as I know, MSFT isn't one of them) can move the needs for capital to where the money is.

Not exactly stunning proof, but one of the talking head analysts from whatever major bank was talking about it on CNBC. They somehow incur some charge/tax/whatever for repatriating their overseas money. With such low rates, I assume the bond issue is cheaper.

 

[a123456]

I'm going to be polite and ask if you have anything to support this?

Never mind the previous post. Found their technique: http://www.informationclearinghouse.info/article15704.htm

Basically, Microsoft establishes a subsidiary in some low-tax country, like Ireland. Then, they claim that they do a lot of development in Ireland. Since they're a tech company, which deals a lot in IP, the US doesn't really complain too much. So all their money and taxes run through that country with the low corporate tax rate.

It's pretty standard software industry practice. Google, etc. do it also.

So, they have a ton of profits in Ireland, Singapore, Bahamas and other tax havens. Problem is that if they try to bring the money back to the US to do anything, they have to pay the full US corporate tax rate on it, which is obviously undesirable.

In a nutshell, the ridiculously low interest rates on their bonds will help them move the money legally.