I was curious why Microsoft with $20 billion in cash would issue corporate bonds for the first time in its history this week. The Baseline Scenario explains it,
Microsoft: Just Another Company.
"Earlier this week, Microsoft issued long-term debt for the first time in its history, selling $3.75 billion of 5-, 10-, and 30-year bonds. From a corporate finance perspective, I guess this makes sense, since it got to lock in historically low borrowing rates. Treasuries are low, and Microsoft paid only about one percentage point more than the U.S. government, which makes sense since it does have over $20 billion in cash, no other long-term debt, and – let’s not forget – a virtual monopoly on computer operating systems and basic desktop software."
There's a nice "Corporate Finance for Beginners" tutorial and some more points. Worth a read.
4 comments:
From a financial standpoint it makes eminent sense - using debt on the balance sheet reduces the tax bill and these saving flow directly to the shareholders. I am assuming that Microsoft has significant profits that can be thus shielded from taxes, so the number is big enough to make this worth doing; and that Microsoft generates enough cash to service the debt making this practically risk free from a default standpoint.
It's like you read the article. :)
So that all makes sense, and I won't pretend to really understand economics, but why are they doing it now for the first time? Surely similar conditions applied in the past.
Hmmm, "historically low borrowing rates".
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