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February 07, 2013|Brett Arends
Could Bill Gates and Steve Ballmer follow Michael Dell’s lead? Could Microsoft get taken private?
It sounds far-fetched, and maybe it is. After all, Microsoft is one of the world’s largest companies, with a market value of $230 billion.
But in this environment, thanks to the madness of Wall Street and the low-interest climate created by “Helicopter Ben” Bernanke, anything is possible. The numbers, remarkably, may work. (If you’re in private equity and you’re reading this, remember: I get 1% of any deal).
In case you missed it, Dell this week announced it is being taken private in a $24 billion deal, one of the biggest ever struck on the stock market. And when I was calling around to my sources this week, asking about who might follow Dell, Mr. Softy was the surprise name that came up.
The Dell takeover isn’t just about the company’s collapsing stock price, which makes the takeover so cheap. It’s about the bond bubble, which makes the deal easy.
Driven by the Federal Reserve and the public’s insatiable mania for bonds, the interest rates on corporate debt have collapsed. For instance, the average interest rate on BBB-rated bonds -- the riskiest bonds that can still claim to be “investment grade” – has plunged to just 3.4%.
To put this in context, the central indicator in the bond market predicts inflation over the next ten years will be 2.6%. So people buying BBB-rated bonds are lending money to relatively risky companies in the hope of earning just 0.8% above inflation—before tax.
From the point of view of people like Michael Dell and the private equity honchos helping take his company private, this makes the logic of the deal pretty simple. When someone offers you free money, take it.
And if bankers can leverage up a takeover with money borrowed at 3.4%, or anything close, there are a lot of deals that suddenly look viable. Remember, as ever, that if the deal goes sour down the road it’s the bond investors, not the private equity boys, who lose out.
Let’s run the numbers on Microsoft.
If someone — let’s say Ballmer — wanted to take Microsoft private, he’d have to raise the money to buy up all the shares. To persuade stockholders to sell he’d have to offer them more than the current market price — probably, based on standard Wall Street price, about 30% more.
According to Microsoft’s public filings, the company has 8.4 billion shares outstanding. At the current market price, $27.44, they value the entire company at $230 billion. If a buyer had to offer 30% more, that would be about $36 per share — a total cost of around $300 billion.
Where would the dealmakers get the money? And what would the deal look like?
The first place they’d look would be the company’s own bank vaults. Microsoft is sitting on a thumping $90 billion in cash, securities and other liquid assets, including inventories and receivables. It needs about $30 billion to meet short-term needs, such as accounts payable, but that leaves $60 billion instantly free to help pay for the deal.
While much of that money is held overseas, to avoid U.S. taxes, in a buyout deal that needn’t be a problem. The buyers of the company could borrow from Singapore or Brazil or Germany and use this money to pay it back. Easy.
This means the buyers would only have to pay $240 billion for the company in net terms.
Why would they do this? Simple.
Microsoft is a cash machine. An awesome one. And despite all the talk about the stock’s “lost decade,” and its dreadful stock performance since the dotcom bubble burst, the cashflow at Mr. Softy just keeps going up and up and up.
In 2005 the company’s earnings before interest, tax and depreciation — so-called EBITDA, the standard measure of cash flow when contemplating a buyout — was $17.5 billion. Last year it was $30 billion. Analysts expect $33 billion in the fiscal year ending in June, according to Thomson Reuters.
Cashflow like that could make a buyout very profitable.
Someone who wants to buy Microsoft would use as much of that cashflow as possible to pay the coupons on debt, leaving themselves a small amount of equity with lots of upside.
Microsoft borrowed money as recently as November on very good terms, paying a fixed rate of interest of just 3.5% for 30 years. Someone running a leveraged buyout could help pay for the takeover by issuing $220 billion in bonds, paying a generous coupon rate of perhaps 6%. In this environment, as investors fall over themselves for bonds, that would be an easily sell.
The interest on those bonds would cost the company a little over $13 billion a year — less than half its current $30 billion in EBITDA.
Now look at what this would mean for the management and private equity folks running a leveraged buyout.
They would pay for most of the deal using the company’s own cash ($60 billion) and money borrowed from bondholders ($220 billion). If the deal cost $300 billion, they would only need to find the remaining $20 billion.
Meanwhile paying for the borrowed money would only cost about $13 billion a year, leaving them free to pocket $17 billion, and rising, from the remaining cashflow.
Hmmm … How’s an 85% annual return on investment sound to you?
Remember these numbers don’t even factor in any increase in operating cash flow. They are simply based on the very conservative assumption that the cashflow would stay flat.
Ronald Chan, analyst at the Appleseed Fund in Chicago, wonders whether the deal would just be too big for Wall Street to swallow. But he says in terms of raw math, it works.
“Would Microsoft be a candidate? Absolutely,” he says. The cashflows are huge, stable and rising, he says. He predicts single-digit earnings growth in future years.
Maybe this won’t happen. Indeed, it probably won’t happen, as the deal would be so big. But the math does reveal one thing: Microsoft stock at current levels looks extremely cheap. The dividend yield is 3.4%, and the stock is priced at nine times forecast earnings even before you account for the company’s big pile of spare cash.
It also reveals another thing: The era of free money makes it much more attractive to buy the right stocks with borrowed money than it does to own most bonds.
Chan adds that even though Microsoft isn’t likely to go for a full buyout, the company has been quietly engaged in a similar process for years. It has been issuing debt and using the money to pay money back to stockholders, both through dividends and by redeeming stock. “If you look at the dividends and the debt, it’s a slow buyout,” he says. “It’s been happening.”
The rich get richer. What is not to like?
February 07, 2013|Brett Arends
Could Bill Gates and Steve Ballmer follow Michael Dell’s lead? Could Microsoft get taken private?
It sounds far-fetched, and maybe it is. After all, Microsoft is one of the world’s largest companies, with a market value of $230 billion.
But in this environment, thanks to the madness of Wall Street and the low-interest climate created by “Helicopter Ben” Bernanke, anything is possible. The numbers, remarkably, may work. (If you’re in private equity and you’re reading this, remember: I get 1% of any deal).
In case you missed it, Dell this week announced it is being taken private in a $24 billion deal, one of the biggest ever struck on the stock market. And when I was calling around to my sources this week, asking about who might follow Dell, Mr. Softy was the surprise name that came up.
The Dell takeover isn’t just about the company’s collapsing stock price, which makes the takeover so cheap. It’s about the bond bubble, which makes the deal easy.
Driven by the Federal Reserve and the public’s insatiable mania for bonds, the interest rates on corporate debt have collapsed. For instance, the average interest rate on BBB-rated bonds -- the riskiest bonds that can still claim to be “investment grade” – has plunged to just 3.4%.
To put this in context, the central indicator in the bond market predicts inflation over the next ten years will be 2.6%. So people buying BBB-rated bonds are lending money to relatively risky companies in the hope of earning just 0.8% above inflation—before tax.
From the point of view of people like Michael Dell and the private equity honchos helping take his company private, this makes the logic of the deal pretty simple. When someone offers you free money, take it.
And if bankers can leverage up a takeover with money borrowed at 3.4%, or anything close, there are a lot of deals that suddenly look viable. Remember, as ever, that if the deal goes sour down the road it’s the bond investors, not the private equity boys, who lose out.
Let’s run the numbers on Microsoft.
If someone — let’s say Ballmer — wanted to take Microsoft private, he’d have to raise the money to buy up all the shares. To persuade stockholders to sell he’d have to offer them more than the current market price — probably, based on standard Wall Street price, about 30% more.
According to Microsoft’s public filings, the company has 8.4 billion shares outstanding. At the current market price, $27.44, they value the entire company at $230 billion. If a buyer had to offer 30% more, that would be about $36 per share — a total cost of around $300 billion.
Where would the dealmakers get the money? And what would the deal look like?
The first place they’d look would be the company’s own bank vaults. Microsoft is sitting on a thumping $90 billion in cash, securities and other liquid assets, including inventories and receivables. It needs about $30 billion to meet short-term needs, such as accounts payable, but that leaves $60 billion instantly free to help pay for the deal.
While much of that money is held overseas, to avoid U.S. taxes, in a buyout deal that needn’t be a problem. The buyers of the company could borrow from Singapore or Brazil or Germany and use this money to pay it back. Easy.
This means the buyers would only have to pay $240 billion for the company in net terms.
Why would they do this? Simple.
Microsoft is a cash machine. An awesome one. And despite all the talk about the stock’s “lost decade,” and its dreadful stock performance since the dotcom bubble burst, the cashflow at Mr. Softy just keeps going up and up and up.
In 2005 the company’s earnings before interest, tax and depreciation — so-called EBITDA, the standard measure of cash flow when contemplating a buyout — was $17.5 billion. Last year it was $30 billion. Analysts expect $33 billion in the fiscal year ending in June, according to Thomson Reuters.
Cashflow like that could make a buyout very profitable.
Someone who wants to buy Microsoft would use as much of that cashflow as possible to pay the coupons on debt, leaving themselves a small amount of equity with lots of upside.
Microsoft borrowed money as recently as November on very good terms, paying a fixed rate of interest of just 3.5% for 30 years. Someone running a leveraged buyout could help pay for the takeover by issuing $220 billion in bonds, paying a generous coupon rate of perhaps 6%. In this environment, as investors fall over themselves for bonds, that would be an easily sell.
The interest on those bonds would cost the company a little over $13 billion a year — less than half its current $30 billion in EBITDA.
Now look at what this would mean for the management and private equity folks running a leveraged buyout.
They would pay for most of the deal using the company’s own cash ($60 billion) and money borrowed from bondholders ($220 billion). If the deal cost $300 billion, they would only need to find the remaining $20 billion.
Meanwhile paying for the borrowed money would only cost about $13 billion a year, leaving them free to pocket $17 billion, and rising, from the remaining cashflow.
Hmmm … How’s an 85% annual return on investment sound to you?
Remember these numbers don’t even factor in any increase in operating cash flow. They are simply based on the very conservative assumption that the cashflow would stay flat.
Ronald Chan, analyst at the Appleseed Fund in Chicago, wonders whether the deal would just be too big for Wall Street to swallow. But he says in terms of raw math, it works.
“Would Microsoft be a candidate? Absolutely,” he says. The cashflows are huge, stable and rising, he says. He predicts single-digit earnings growth in future years.
Maybe this won’t happen. Indeed, it probably won’t happen, as the deal would be so big. But the math does reveal one thing: Microsoft stock at current levels looks extremely cheap. The dividend yield is 3.4%, and the stock is priced at nine times forecast earnings even before you account for the company’s big pile of spare cash.
It also reveals another thing: The era of free money makes it much more attractive to buy the right stocks with borrowed money than it does to own most bonds.
Chan adds that even though Microsoft isn’t likely to go for a full buyout, the company has been quietly engaged in a similar process for years. It has been issuing debt and using the money to pay money back to stockholders, both through dividends and by redeeming stock. “If you look at the dividends and the debt, it’s a slow buyout,” he says. “It’s been happening.”
The rich get richer. What is not to like?
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