Microsoft May Borrow for First Time to Buy Yahoo (Update6)

By Dina Bass and Bryan Keogh


Feb. 4 (Bloomberg) -- Microsoft Corp. will probably sell bonds for the first time to finance its proposed $44.6 billion takeover of Yahoo! Inc., offering a top-rated investment in a newcomer to the debt markets.

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 will raise the rest in a debt sale, Chief Financial Officer Chris Liddell told analysts today in New York. He didn't say how much he's likely to borrow.

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're flirting with a triple- A,'' he said. ``How they handle the merger will dictate the view the market has of the credit.''

A Microsoft bond maturing in 2018 may yield about 1.60 to 1.70 percentage points more than a U.S. Treasury security of the same maturity, Crandall said. That would be a total yield of 5.2 percent to 5.3 percent, based on current Treasury prices.

Microsoft, based in Redmond, Washington, fell 26 cents to $30.19 at 4:30 p.m. New York time in Nasdaq Stock Market trading. On Feb. 1, the day the operator of MSN.com announced its bid, the shares dropped 6.6 percent, their largest decline since April 2006.

GE Capital

Top-rated General Electric Capital, the financing arm of the world's third-largest company by market value, on Nov. 29 issued $4 billion of 5.25 percent notes due in 2017 at a yield of 140 basis points more than benchmark rates, according to Bloomberg data. A basis point is 1/100 of a percentage point.

The software maker could do more than borrow money to expedite the takeover. Microsoft may seek to oust Yahoo's directors should they reject the bid and submit its own slate of nominees, according to a person familiar with the matter who asked not to be identified. The deadline for board nominations is March 13. Microsoft spokesman Frank Shaw declined to comment.

Liddell, speaking at an investor conference, said Microsoft wanted to offer an attractive price to speed acceptance of the purchase as it takes on Google Inc. in the Internet advertising market. Microsoft had $21.1 billion in cash and short-term investments as of Dec. 31.

`Stable Cash Flow

``Given the visibility of their cash flow, they'll probably get a low rate,'' said Brendan Barnicle, an analyst at Pacific Crest Securities in Portland, Oregon, who advises investors to buy Microsoft shares. ``You can't find many companies with more stable cash flow than Microsoft.''

Microsoft's cash pile peaked at $60.6 billion in the fiscal year that ended June 30, 2004, weeks before it announced a $3-a- share onetime dividend on top of a regular dividend increase and a $30 billion four-year share repurchase plan.

By May 2006, with the $30 billion buyback allotment almost finished and almost $35 billion in cash still on the books, some shareholders demanded a buyback of $60 billion or more to be funded buy cash and debt.

That July, Microsoft announced a $20 billion regular repurchase program over five years combined with a onetime $20 billion tender offer for its shares. The tender offer was undersubscribed, so Microsoft boosted the regular buyback.

Microsoft is one of 27 members of the Standard & Poor's 500 Index with no bond debt of its own, according to Bloomberg data. More than half of the 27 are technology companies, including Google, Apple Inc. and Texas Instruments Inc. The average bond issued by technology and electronics companies is rated A3, Merrill Lynch & Co. index data show.

Five-Year Notes

Microsoft's bonds would probably get a high double-A rating, said Tom Atteberry, who manages $2.8 billion of fixed-income assets at First Pacific Advisors LLC in Los Angeles. Five-year notes may yield about 4 percent, he said.

``You've got this tremendous cash-flow machine,'' said Atteberry, who would prefer Microsoft bonds with maturities of five years or less. ``I'll take a serious look at it.''

Oracle Corp., the world's third-biggest software maker, raised $3.5 billion in January 2006 in its first sale of corporate bonds in nine years. A month later, Cisco Systems Inc., the biggest maker of network equipment, sold $6.5 billion of debt in its inaugural offering.

Oracle, Cisco

The Oracle offering included 5.25 percent notes due in 2016, rated A2 by Moody's Investors Service, that paid a spread of 90 basis points at issue, Bloomberg data show. The debt now yields 144 basis points more than benchmark rates, according to Trace, the Financial Industry Regulatory Authority.

Cisco sold 5.5 percent notes due in 2016 with a spread of 95 basis points. The securities, rated A1 by Moody's, currently trade at a spread of 128 basis points.

``It's a new name, it's not in finance,'' said Wilmer Stith, who manages about $3 billion of fixed-income assets at MTB Investment Advisors in Baltimore and who may consider buying Microsoft debt. ``It should be met with good demand.'' He said the bonds may be rated AA- or higher.

Even with high ratings, Microsoft will still probably have to a pay new-issue concession like other borrowers right now because of ``skittishness'' in credit markets, Stith said.

Credit-default swap prices indicate speculation started heating up last week that Microsoft would sell debt. On Feb. 1, CMA Datavision, a London-based credit-default swap pricing service, published its first Microsoft default swap price in more than a year.

Credit-Default Swaps

The contracts rose to 15 basis points today, from 7.5 basis points on Feb. 1, according to CMA. An increase in the contracts, which investors use to speculate on a company's ability to repay its debt or to hedge against losses, signals investors see credit risk rising.

Yahoo's directors haven't responded to the takeover offer.

``We trust the Yahoo board and the Yahoo shareholders will join with us quickly in deciding to move down an integrated path,'' Microsoft Chief Executive Officer Steve Ballmer said at today's conference.

Liddell said the offer strikes a balance between attracting Yahoo stockholders and allowing Microsoft to increase value for its own investors.

``We think it's in our interest, in Yahoo's interest to resolve their future as quickly as possible,'' he said. ``Our thinking in striking what we consider to be an attractive price was to make it as attractive as possible to move quickly.''

AQuantive Debt

Microsoft took on $80 million in debt from AQuantive Inc. when it bought the Internet advertising company for $6 billion in August. Both the AQuantive acquisition and the proposed takeover of Sunnyvale, California-based Yahoo are part of Microsoft's effort to compete with Google in the $40 billion-a-year market for Internet search services and advertising.

Separately, Microsoft said it completed a package of fixes to its Windows Vista PC operating system. Many corporations wait to adopt new operating systems until the release of what's called Service Pack 1, Ballmer told analysts. Microsoft also finished work on its new Windows system for running server computers.