Microsoft's Surprise Debt Offering

Recessionary times leave many companies in desperate need of liquidity to bolster their operations. But it still surprised me to hear that a powerhouse such as Microsoft Corporation (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 got the top notch "AAA" rating 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 equity in a year as bad as 2008, that is pretty cheap financing.

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

It appears to me 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. It might increase the value of the firm but not necessarily in a useful way.

For an investor knowledgeable enough of the software business who is seeing a good opportunity to invest in Microsoft, the stock has never presented such a big margin of safety in the last 10 years. Their steadily growing dividend is an other good sign of the strength of the company.

I have not quite grasped the implications of what they will do with the money they just raised; only time will tell. In the meantime, I am pretty sure many investors are loading up on of those Microsoft shares trading at historically low levels.

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

Comments

[Graham and ...:]

Dear Young Grahamite:

I like Microsoft stock, even though I have to "bend" my Graham and Dodd rules to own it, using a formula I call "modified investment value."

Older people like me are glad to see younger investors take an interest in Ben Graham's philosophy and methodology. Would you like to "train" with me by becoming a follower?

May 26 11:36 AM

[Grahamite I...:]

I took a look at your instablog and the content is pretty interesting, I'll stay updated.


On May 26 11:36 AM Graham and Dodd Investor wrote:

> Dear Young Grahamite:
>
> I like Microsoft stock, even though I have to "bend" my Graham and
> Dodd rules to own it, using a formula I call "modified investment
> value."
>
> Older people like me are glad to see younger investors take an interest
> in Ben Graham's philosophy and methodology. Would you like to "train"
> with me by becoming a follower?

Jun 01 01:39 PM