Chaos in the money markets gave Microsoft Corp. an opening Monday to announce it would take on debt for the first time, launch a new $40 billion stock buyback plan and raise its dividend.
The moves indicate that for all the credit problems plaguing the financial sector, cash-laden technology companies with good credit ratings are still borrowing money on favorable terms and otherwise enjoying flexibility.
The largest information-technology company, Hewlett-Packard Co., approved an $8 billion buyback plan Monday. And Intel Corp. Chairman Craig Barrett told The Associated Press that the chip maker — which boasted $11.5 billion in cash and $2.1 billion in debt at the end of the last quarter — was feeling no squeeze from the credit crunch.
“I don’t see any slowdown in our technology investment or R&D investment or manufacturing investment going forward,” he said. “When you’ve got 10, 15 billion dollars in your bank account, short-term credit is not a significant issue.”
Microsoft, which benefits from having $23.7 billion in cash and short-term investments on hand as of June 30, historically has avoided taking on debt to fund day-to-day operations, acquisitions and stock buybacks, even as many of its peers, including IBM Corp. and Oracle Corp., have done so.
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Oracle, for one, has accumulated $11.2 billion in debt in recent years while buying up dozens of its smaller rivals, while sitting on $13 billion in cash as of Aug. 31. The business software maker indicated recently that much of that money would go toward acquisitions or buybacks.
Microsoft did plan to borrow money for its $47.5 billion run at Yahoo Inc. this year, but the proposal fell through before the company issued any debt.
Now, as investors are growing increasingly risk-averse, blue-chip companies like Microsoft are finding interest rates on commercial paper — short-term loans that range from overnight to nine months — hovering around 2 percent. Finally the world’s largest software maker decided it was time to borrow.
The company said Monday its board approved a $2 billion commercial paper program, as part of a bigger $6 billion, open-ended allowance for debt financing. Moody’s Investors Service and Standard & Poor’s Rating Services both assigned Microsoft’s debt their highest ratings.
“They’ve had pressure to do this for a long time, and I think it’s a process of just getting everybody at the company comfortable with taking on debt,” said Walter Pritchard, an analyst at Cowen and Co.
Heather Bellini, an analyst for UBS, said she was surprised by the move, given that the company was vague about what it might use the proceeds for.
“Listening to (CEO) Steve Ballmer in the past, his position has been he wouldn’t issue debt for the sake of issuing debt,” the analyst said. But given the interest rates available to companies like Microsoft right now, “I think they were just being opportunistic,” she said.
In general, taking on debt makes sense for a company like Microsoft. The interest payments Microsoft would make are tax-deductible, which could help boost Microsoft’s mighty profits even more.
Richard Lane, a senior vice president at Moody’s, also noted that because much of Microsoft’s revenue growth comes from overseas, it’s cheaper to use debt to fund buybacks and other domestic activities than to do it with money that originates with overseas sales and is taxed when it is brought back into the U.S.
Microsoft also raised its quarterly dividend to 13 cents from 11 cents, payable Dec. 11 to shareholders of record on Nov. 20. Investors reacted to that, the buyback and the debt offering by sending Microsoft’s shares up 24 cents, nearly 1 percent, to close at $25.40 even as the broader market fell.
Microsoft’s fiercest competitor in the Web search business, Google Inc., has said it isn’t planning to buy back stock or take on debt. Google has $12.7 billion in cash, which it prefers to use for acquisitions and investments in its business.
“The drama is in New York, not here,” Chief Executive Eric Schmidt said in a meeting with reporters last week. “It’s business as usual at Google.”