Microsoft may need to abandon its longstanding financial independence to complete a takeover of Yahoo, the company said …
“In a sign of just how badly Microsoft wants Yahoo, the software maker’s CFO said that the company would borrow cash for the first time to fund its proposed $44.6 billion acquisition of its Internet rival…”
Seattle — Microsoft Corp. said on Monday it may borrow money for the first time in its history to fund a portion of its $44.6 billion unsolicited offer for Yahoo Inc.
Shareholders would see Microsoft shoulder debt if it buys Yahoo for $44.6 billion. And Microsoft’s profits would dip for at least two years because of the Yahoo acquisition. But an analyst says Google’s quick opposition may demonstrate that Microsoft’s bid for Yahoo is a good move.
The world’s largest software maker will use cash and stock to pay part of the $31 a share it has bid for Yahoo in the biggest technology takeover ever.
“It is a story that continues to send shock waves through the technology world. Microsoft is vying to acquire Yahoo. Google is bent on doing everything in its power to stop it. The stage is set for a long drama.”
Microsoft Chief Financial Officer Chris Liddell said the software company may issue some debt to finance the cash portion of its 50-50 stock and cash offer for Yahoo, instead of drawing down its entire $21 billion cash pile.
“We could fund most of that through our cash holdings, but it is likely we are actually going to borrow for the first time. It will be a mixture of the cash on hand, plus debt," Liddell, speaking to a group of financial analysts, said of Microsoft’s Yahoo bid.
“Liddell did not say how much external financing Microsoft would seek.”
Liddell declined to say whether Microsoft was already buying Yahoo stock on the open market. He also did not give any information on what form of debt Microsoft will seek in the capital markets.
Liddell’s disclosure should not be too surprising. Microsoft had about $21.1 billion in cash and cash equivalents at the end of its most recent quarter. So the company, in the absence of turning to the capital markets, would have to use virtually all its cash — plus more than $20 billion in stock — to buy out Yahoo.
A Microsoft bond may attain the highest AAA rating, according to James Crandall, head of syndication at Calyon New York. He compared the maker of the Windows operating system with General Electric Capital Inc., last year’s most prolific borrower, and Warren Buffett’s Berkshire Hathaway Inc.
“With an entity like this, you are flirting with a triple-A,” he said. “How they handle the merger will dictate the view the market has of the credit.”
Microsoft’s cash reserves took a hit last year when the company completed its $6 billion acquisition of digital advertising agency aQuantive. The deal, which closed in August, was an all-cash transaction.
Microsoft’s willingness to go into hock to acquire Yahoo is an indication of the strategic importance it places on the deal as it seeks to catch Google in the Web search and advertising markets.
Microsoft Chief Executive Steve Ballmer said the offer for Yahoo was generous and he expects Yahoo’s board and shareholders to agree to the buyout quickly.
“We trust the Yahoo board and the Yahoo shareholders will join with us quickly in deciding to move down an integrated path,” Ballmer said.
“We are trying to increase scale and increase capacity to give ourselves a better chance to be more successful more quickly,” Ballmer said at Monday’s analyst meeting.
However, reports have surfaced that Yahoo considers Microsoft a threat and that the company is considering an alliance with Google or other alternative firms as an attempt to make a Microsoft deal impractical or impossible.
Google has commented on the deal and warned that Microsoft might translate its monopolies with Office and Windows to the Internet by creating proprietary web standards.
Marc Pado, an analyst at Cantor Fitzgerald, sees an upside.
“Microsoft shareholders have been looking for some sort of new innovation and new direction. They keep talking about challenging Google,” Pado said. “Microsoft may be considering that taking on debt at these low interest rates may not be such a bad idea.”
A Yahoo takeover may take time to pay off for shareholders, but Pado still views it as a win for Microsoft. Google’s quick response to try to block the deal, he said, demonstrates that a Yahoo acquisition would be a positive move for Microsoft.
Microsoft also said its first major update to Windows Vista was released to manufacturing. Usually, large organizations wait for the first major update before deploying a new operating system.
The release, known as Service Pack 1 (SP1), will contain improvements in security, reliability and performance. SP1 will be available in mid-March through Windows update in English, French, German, Spanish and Japanese.