Microsoft plans stock buyback, debt sale

Published: 9/22/2008 11:30 AM

Microsoft Corp., seeking to revive the share price after a 29 percent slump this year, plans to buy back as much as $40 billion in stock, raise its dividend and issue its first commercial paper.

Microsoft rose the most in almost a year in Nasdaq trading. The biggest software maker added a $2 billion commercial paper program and said it may ultimately sell as much as $6 billion in debt. Standard & Poor's gave its highest possible credit rating to Microsoft, the first company to get the AAA rank in a decade.

Chief Financial Officer Chris Liddell is tapping demand for high-quality paper in a time of turmoil in the markets and a proposed $700 billion bank bailout, and he is trying to win back shareholders after a failed bid for Yahoo! Inc. The moves, and an $8 billion buyback today from Hewlett-Packard Co., may indicate a dearth of big takeover targets in the industry.

"They've been seeing some pressure from investors to use more of their cash for buybacks," said Donovan Gow, an analyst at Greenwich, Connecticut-based American Technology Research. "They're not seeing a lot of really attractive acquisitions, particularly following the Yahoo debacle, so the view is this is the best thing to do with their huge cash balances."

Microsoft has returned more than $115 billion to investors over the past five years in repurchases and dividends. The $47.5 billion Yahoo bid, and concern that Chief Executive Officer Steve Ballmer didn't have a strong enough Plan B when the effort fell through, drove down the stock this year. Analysts including Heather Bellini predicted up to $20 billion in new buybacks.

The full $40 billion would buy about 17 percent of Microsoft shares at yesterday's closing price. The company had $23.7 billion in cash and short-term investments June 30.

Redmond, Washington-based Microsoft had slowed the pace of repurchases to $12.4 billion in the year ended June 30 as it tucked away cash to buy Yahoo. The stock, which gained 21 percent in the last quarter of 2007, this year traded at the lowest estimated price-earnings ratio since it went public 22 years ago.

Liddell, who joined in 2005 from International Paper Co., has pressed to broaden the capital structure to include debt. He told analysts the stock price was "incredibly frustrating" at a meeting in July and said a buyback "makes more sense than it ever has."

"Chris has done a good job of accelerating the return of cash," said Charles Di Bona, a New York-based analyst at Sanford C. Bernstein & Co. He expects the shares to outperform the market. "He's done a good job of moving the company toward being a little more financially disciplined that way."

Frank Shaw, a spokesman for Microsoft, declined to comment.

The dividend will be 13 cents a share each quarter, 18 percent more than the previous payout, the company said today. It will be paid Dec. 11 to shareholders as of Nov. 20.

Moody's Investors Service today rated Microsoft Aaa, its highest rating. The commercial paper program also got the highest rating from both Moody's and S&P.

The commercial paper issue looks "very promising" because Microsoft isn't a financial company, said Jill King, a senior portfolio manager at Horizon Cash Management in Chicago who oversees $2.5 billion in fixed-income assets.

"I would think there would be good demand for them," she said. "For us to have a new name added to the list that could diversify the consumer product type names we've been buying, we would be happy to see it. It's nice to have another name out."

Companies typically sell commercial paper, which usually matures in three months or less, to help pay day-to-day expenses, including payroll and rent. King said it's too early to speculate on what the pricing for any debt issues would be.

The number of borrowers with top rankings has dwindled as companies sacrificed their credit quality to boost their share prices. Automatic Data Processing Inc., Berkshire Hathaway Inc., Exxon Mobil Corp., General Electric Co. and Johnson & Johnson are the only other U.S. industrial companies with the highest grade from both Moody's and S&P.

In the early 1980s, S&P rated more than 30 non-financial companies AAA, the company said in a statement today. Companies that have lost AAA ratings since then include Merck & Co. and United Parcel Service Inc.

Microsoft was assigned the top grade because of its "dominant competitive position" and "financial conservatism," Nicholas Riccio, an analyst at S&P in New York, said in a report.

Microsoft took on $80 million in debt from AQuantive Inc. when it bought the Internet advertising company for $6 billion in August.


Buying back stock is a better way to boost Microsoft's shares now than getting interest income from short-term investments, since the market is struggling, analyst Gow said.

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

By May 2006, with the allotment almost gone 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 repurchase over five years and a one-time $20 billion tender offer for its shares. The tender offer was undersubscribed, so Microsoft boosted the regular buyback.

With the option to issue debt, Microsoft could still make a large acquisition if it finds a willing partner, including a new attempt to buy Yahoo, Donovan said.

"Even though they're publicly talking about walking away from Yahoo, they're certainly not closing the door completely on that," he said. "This leaves the door open."