Comments on: Ford’s stock issue makes more sense than Microsoft’s bond

By: fred

fred — Tue, 12 May 2009 20:14:43 +0000

Very smart move by Microsoft. In about three years they’ll be able to invest it in 10 year treasury notes yielding 25%. Free money.

By: Anal_yst

Anal_yst — Tue, 12 May 2009 19:38:37 +0000

Agreed with Mark and Eddy; The analysis here is quite simple (I’m way too lazy to actually do it, but that’s another story), although I’m not certain if I did it I’d come to the same conclusion as Mr. Softy…

To grossly oversimplify:

If C(Equity) + PV(Tax Sheild) > C(Debt), raise debt, of course this would depend on their projected ROE (C(equity)) and ROA, which I think they’re surely over-estimating, but waddya gonna do?

By: Mark

Mark — Tue, 12 May 2009 18:10:12 +0000

The potential for an acquisition and the notion that MSFT still wants to grow are good possibilities, but I offer a third:

MSFT is increasing operating leverage so they get greater impact down at the bottom line. MSFT may view (as many others do) that a long period of tepid growth is on the horizon, and in order to generate earnings growth in excess of their peers, it’s time to lever up. Particularly with rates as low as they are.

By: claus vistesen

claus vistesen — Tue, 12 May 2009 17:39:49 +0000

A fine piece of corporate finance punditry here Felix.

I agree with you on the future growth prospects of MS; they are definitely not going to repeat history here. Anyways, isn’t buying back equity a fundamental good idea here in this environment if you have the cash for it? This would of course leave the question of why the heck they need to sell paper to finance the re-purchase.

What about your own argument; perhaps they just want to increase the tax shield here?

Claus

By: Anurag

Anurag — Tue, 12 May 2009 16:59:01 +0000

There’s also every reason to believe there is a large acquisition (yahoo, sap) in microsoft’s immediate future, and it is useful for them to get pricing set in advance of that.

By: Eddy Elfenbein

Eddy Elfenbein — Tue, 12 May 2009 14:49:13 +0000

Hi Felix – A lot of MSFT’s cash (now up to $25 billion) is generated outside the U.S. So transferring the existing cash horde to dividends or stock buybacks is a taxable event. – Eddy

By: steve

steve — Tue, 12 May 2009 14:25:05 +0000

If they are becoming a utility, that’s all the more reason to have a financial structure with some debt, rather than 100% equity. If they can buy their cheap equity with their cheap debt it could be a good deal from several perspectives.