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Vitaliy Katsenelson
Vitaliy Katsenelson
Articles (126)  | Author's Website |

Microsoft Debt Issuance Makes Zero Economic Sense

June 09, 2010 | About:

Tuesday’s headline from the WSJ reads: Microsoft Corp. (NASDAQ:MSFT) to offer up to $1.25 billion in 3-year convertible notes.”

The software company will use the sales proceeds to repay short-term debt. If it was any other company I’d ignore this headline as a daily noise as this kind of things happens all the time. But Microsoft has $39 billion of cash and generates $16-$17 billion of free cash flows a year. Issuing short-term debt, for which Microsoft will surely pay higher interest than it receives on the pile of its cash makes absolutely no economic sense – zero.

Microsoft has $1 and $0.75 billion of debt that matures in 2019 and 2039, respectively. Ironically, though this debt comes with higher interest, it makes sense if the company believes that we’ll have significant inflation and it will be paying off its debt with inflated dollars.

When you are sitting on pile of cash that earns nothing, borrowing short-term (three years is short-term) makes no economic sense. It seems Microsoft finance department suffers from the same problem many investors do, it cannot sit on its hands, it has to do something even if it is losing proposition for the company and shareholders.

Vitaliy Katsenelson


About the author:

Vitaliy Katsenelson

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of The Little Book of Sideways Markets (Wiley, December 2010). To receive Vitaliy’s future articles by email or read his articles click here.
Investment Management Associates Inc. is a value investing firm based in Denver, Colorado. Its main focus is on growing and preserving wealth for private investors and institutions while adhering to a disciplined value investment process, as detailed in Vitaliy’s book Active Value Investing (Wiley, 2007).

Visit Vitaliy Katsenelson's Website

Rating: 4.3/5 (8 votes)


Batbeer2 premium member - 7 years ago

They have earmarked that cash for other purposes and do not wish to tip their hand at this point. Just speculation mind you.
Junk - 7 years ago    Report SPAM
the convertible bond didn't make sense to me either. somehow the investment bankers managed the Microsoft's finance department to do a stupid trade. if i were bill gates, i'd fire all these finance people
Jrhubbard - 7 years ago    Report SPAM
Isn't this deja vu? Didn't they do the same thing a while back? I seem to remember speculation that they might be testing the waters, in case they decided to make a large acquisition (the speculation at the time was that the acquisition would be RIMM... although certainly speculation, this still makes a lot of strategic sense).

David Pinsen
David Pinsen - 7 years ago    Report SPAM
Isn't this deja vu? Didn't they do the same thing a while back? I seem to remember speculation that they might be testing the waters.

Right. It's also possible that they'll decide to blow out most of their cash in the near future as a special dividend (something they have done before). Whether that, or levering up for acquisitions are good ideas is another question, but if that's what they have in mind, it might make sense for them to dip a toe in the credit markets now to test the waters.

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