The Wall Street Journal-20080205-Open Arms for Microsoft Debt-- Possible Bond Offering To Help Fund Yahoo Bid Generates Enthusiasm
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Open Arms for Microsoft Debt?; Possible Bond Offering To Help Fund Yahoo Bid Generates Enthusiasm
Full Text (913 words)NEW YORK -- Investors, battered and bruised by volatility in the credit markets, would welcome a bond offering from Microsoft Corp. that would help finance the company's proposed $44.6 billion acquisition of Yahoo Inc.
Microsoft Chief Financial Officer Chris Liddell yesterday said, "We could fund most of that through our cash holdings, but it's likely we're actually going to borrow for the first time."
The tech giant already has a sizable amount of cash on hand -- $21 billion through the end of 2007 -- so it would only have to raise a fraction of the $22.3 billion it plans to pay in cash for the Internet company.
Bond-market investors estimate that the company could raise at least $5 billion in bonds with maturities of five, 10 and 30 years in an investment-grade market that would eagerly buy bonds from one of the most recognized names in corporate America.
One portfolio manager said he expects a 10-year Microsoft bond to sell with a risk premium, or spread, of less than 1.6 percentage point over U.S. Treasurys. A recently issued 10-year from triple-B-rated transportation company Union Pacific sold at a spread of 2.1 percentage points. Microsoft remains unrated since it hasn't borrowed before, but its debt would be expected to garner high marks from the ratings companies.
The unsolicited bid for Yahoo, if successful, would mark the company's largest acquisition and the biggest technology takeover ever. Yahoo's directors have yet to respond to the takeover offer.
"Microsoft is a major household name. Even if you don't seriously look at credit, you would come to terms with this company pretty quickly," one portfolio manager who declined to be named said.
Mounting defaults on U.S. subprime home loans made to mortgage borrowers with weak credit records have caused investors across the board to shun financing deals as they reassess risk. Now even top- rated corporate borrowers are facing diminished demand and paying more to get deals done as investors have sought safety in government bonds and stayed away from corporate debt.
However, investors are likely to seize the opportunity to diversify their existing portfolios with what would largely be considered a safe-haven investment, said Joe Balestrino, portfolio manager at Federated Investors.
In the current environment, a big debt offering from one issuer could further destabilize the market as investors worry about high debt loads on company balance sheets. But Mr. Balestrino said, "I don't think this would be the case here, given the high-quality reputation of Microsoft."
Technology companies are considered defensive investments because they typically have low levels of debt and good earnings growth.
"The event risk is very low, and there is unlikely to be a significant business downturn," Mr. Balestrino said.
Chief Executive Officer Steve Ballmer said Microsoft decided to make its offer half cash and half stock because the company didn't have the appetite to take on too much financial risk.
Microsoft's cash pile peaked at $60.6 billion in the fiscal year that ended June 30, 2004.
This was just weeks before Microsoft announced a $3-a-share one-time dividend on top of a regular dividend increase, as well as a $30 billion, four-year share-repurchase plan.
Market Braces as Treasury Plans
$22 Billion Sales of Debt
Longer-dated Treasury securities were under the gun yesterday as the market braced for $22 billion sales of government debt later this week.
However, falling U.S. stocks and a smaller-than-forecast increase in December factory orders tempered declines in bonds. The two-year note, the most sensitive to official rate changes, managed to erase earlier losses and ended the day on a positive note as investors expect another rate cut from the Federal Reserve in March.
Late yesterday, the two-year note was up 1/32 point, or $0.3125 per $1,000 face value, to yield 2.060%. The benchmark 10-year note was down 12/32 point at 104 31/32. Its yield rose to 3.643% from 3.598% Friday, as yields gain when prices fall.
As 10-year Treasurys underperformed their two-year peers, the benchmark yield curve, or the gap between the two- and 10-year yields, continued its steepening trend, hitting its widest since 2004.
The Treasury Department is slated to sell $13 billion in 10-year notes Wednesday following by $9 billion in 30-year debt a day later. Increasing supply tends to push down prices and lift yields.
Lack of participants from China also added to selling pressure. China is the second-largest foreign holder of Treasurys after Japan and trading is light there as the world's most populous nation prepares for the Lunar new year holiday on Thursday.
"It is still about supply and equities [stocks]," said Michael Franzese, head of government bond trading in New York at Standard Chartered. "With supply expected to hit markets this week and with Chinese participants moving to the sidelines, yields are backing up a bit and yield curve is steepening."
-- Min Zeng
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AUCTION RESULTS
Here are the results of the Treasury auction of 13-week and 26-week bills.
All bids are awarded at a single price at the market-clearing yield. Rates
are determined by the difference between that price and the face value.
13-Week 26-Week
Applications ................. $59,499,482,000 $64,119,093,000
Accepted bids ................ $23,000,045,000 $21,000,238,000
Accepted noncomp ............. $1,674,472,000 $1,459,693,000
Accepted frgn non ............ $200,000,000 $325,000,000
Auction price (Rate) ......... 99.436306(2.230%) 98.908000(2.160%)
Coupon equivalent ............ 2.280% 2.220%
Bids at market yield ......... 58.490% 73.620%
Cusip number ................. 912795E31 912795F89
Both issues are dated Feb. 7, 2008. The 13-week bills mature May 8, 2008,
and the 26-week bills mature Aug. 7, 2008.
