Microsoft is cash rich: $52 billion in cash lies on its balance sheet. When it goes shopping, will it buy RIM?
To tell, let's see what's already in the cart.
Microsoft famously gobbled up Skype in an all cash $8.5 billion deal. Or, to be more precise, it took out the voice-over-Internet service in an all foreign cash $8.5 billion deal. This was the biggest acquisition in years.
From the look of the filing, the Windows giant used its overseas capital to grab Skype through a combination of foreign cash existing on the balance sheet coupled with the quarter's offshore operating profits. We know that because Microsoft's overseas cash declined $5 billion while its U.S. capital barely budged.
(data from 10Qs)
Even after the Skype purchase, Microsoft's immense overseas cash hoard has reached a mind-boggling $46 billion, enough to buy China Unicom (CHU) or Accenture (ACN) with plenty of yen and euros left-over. That offshore cash hoard towers over the $5 billion held in its U.S. account.
Microsoft's money is over there, not here, a giant stash of cash sitting in foreign subsidiaries ironically invested primarily in U.S. government and corporate paper. All a tad out of reach for use here without incurring further taxation.
The venue used to acquire Skype makes complete sense. In fact, it was a brilliant use of capital.
Skype is Luxembourg-based. Microsoft put some of its overseas profits to buy Skype, avoiding using capital that has been through U.S. taxation. Microsoft saved considerable money using its offshore resources.
Imagine if Skype hadn't been sitting in the middle of Europe. Picture instead an imaginary Skype located in Illinois. How would Microsoft have managed the acquisition?
First, Microsoft wouldn't have had the dollars to do the deal. Its $5 billion is enough. Besides, U.S. operations already must do a yeoman's job of covering the company's capital needs, dividends and buybacks. Remember: Offshore money is off-limits until it is taxed. To do a deal of this magnitude, the company would have had to repatriate capital and incur further taxation. Alternatively, it could have raised capital through debt or equity offerings, not at all appetizing.
The verdict: The "Illinois" Skype would likely not have been bought.
So, what will Microsoft buy? The answer is staring them in the face. The only question is will they bite? And the company is Research In Motion. The acquisition gives them a strong presence in smartphones, something they crave. Very few other companies have the resources or interest to do the takeover.
My guess: RIM is still too expensive. It's on a steady move down. Microsoft can pick it spot. Another billion down in market cap and Microsoft could easily put RIM in its shopping cart.
Should Microsoft pass, expect more big acquisitions over there than here.
After all, when you're holding foreign currency, you'll shop in the international aisles. It's just easier on the wallet.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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