Technology giant, Microsoft Corp. (MSFT) has recently announced the pricing of $715 million (€550 million) and $1.95 billion of senior unsecured notes in Europe and the U.S., respectively. These bonds have been issued in four tranches of different amounts, with varying coupon rates and maturities. The offering is expected to close on May 2, 2013, subject to customary closing conditions.
The first tranch of €550 million carries a coupon rate of 2.625% and will mature in 2033.The second, third and fourth tranches of $450 million, $500 million and $1 billion, carrying a coupon rate of 1.000%, 3.750% and 2.375%, are due to mature in 2018, 2043 and 2023, respectively.
Microsoft stated that the transaction proceeds would be used for general corporate purposes, share repurchases, acquisitions and repayment of existing debt.
Microsoft remains one of the best positioned software vendors, given its wide range of products, emerging markets strength, continued technology deployment at data centers and growth in cloud computing. In the recently reported third quarter, the company spent $1.93 billion on dividends and used $1.03 billion to repurchase its common stock.
Microsoft had $11.9 billion in long-term debt and 2.24 billion in short-term debt, resulting in a net cash balance of $60.29 billion on its balance sheet. Currently, the company’s debt-to-total capitalization ratio is only 15.6%, which will increase after the issuance of these notes.
We believe that Microsoft has a strong balance sheet, which will help the company to capitalize on investment opportunities and make strategic acquisitions, further improving its growth prospects. We believe the senior notes offering will bring down its cost of capital, thus strengthening the company’s balance sheet and supporting its future growth.
However, weak PC demand stemming from tablet cannibalization, particularly from Apple (AAPL), and the company’s failure to expand into mobile gadgets continue to be concerns.
Currently, Microsoft has a Zacks Rank #3 (Hold). Other stocks in the sector that are performing well currently are Applied Materials (AMAT) and Priceline.com Inc. (PCLN), both carrying a Zacks Rank #2 (Buy).
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