Microsoft May Borrow for First Time to Buy Yahoo

Microsoft Corp., the world's largest software maker, will probably borrow money for the first time to finance its proposed $44.6 billion takeover of Yahoo! Inc., Chief Financial Officer Chris Liddell said.

The company will use available cash and stock to pay part of the $31 a share it has offered for Yahoo, Liddell told analysts today at a conference in New York. Microsoft will raise the rest by tapping the capital markets for the first time in its history to complete the biggest technology takeover ever.

Liddell said the company wanted to offer an attractive price to speed acceptance of the bid as it takes on Google Inc. in the Internet advertising market. Microsoft, which had $21.1 billion in cash and short-term investments as of Dec. 31, proposes to pay half the Yahoo purchase price with cash and half with stock. Liddell didn't say how much the company is likely to borrow.

Given the visibility of their cash flow, they'll probably get a low rate, said Brendan Barnicle, an analyst at Pacific Crest Securities in Portland, Oregon, who advises investors to buy Microsoft shares. You can't find many companies with more stable cash flow than Microsoft.

Microsoft, based in Redmond, Washington, rose 7 cents to $30.52 at 11:11 a.m. New York time in Nasdaq Stock Market trading. On Feb. 1, the day Microsoft announced its bid, the shares fell 6.6 percent, their largest decline since April 2006.

Board Nominees

The software maker could do more than borrow to expedite the takeover. Microsoft may seek to oust Yahoo's directors should they reject the bid and offer its own slate of nominees, according to a person familiar with the matter who asked not to be identified. The deadline for nominations is March 13. Microsoft spokesman Frank Shaw declined to comment.

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

By May 2006, with the $30 billion buyback allotment almost finished 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 regular repurchase program over five years combined with a onetime $20 billion tender offer for its shares. The tender offer was undersubscribed, so Microsoft boosted the regular buyback.

Credit-Default Swaps

Credit-default swap prices indicate that speculation started heating up last week that Microsoft would sell debt. On Feb. 1, CMA Datavision, a London-based credit-default swap pricing service, published its first Microsoft default swap price in more than a year.

The contracts rose to 15 basis points today, from 7.5 basis points on Feb. 1, according to CMA. An increase in the contracts, which investors use to speculate on a company's ability to repay its debt or to hedge against losses, signals investors see credit risk rising.

Yahoo's directors haven't responded to the takeover offer.

We trust the Yahoo board and the Yahoo shareholders will join with us quickly in deciding to move down an integrated path, Microsoft Chief Executive Officer Steve Ballmer said at today's conference.

Liddell said the company wanted to choose a price that would strike a balance between attracting Yahoo stockholders and allowing Microsoft to increase value for its own investors.

We think it's in our interest, in Yahoo's interest to resolve their future as quickly as possible, he said. Our thinking in striking what we consider to be an attractive price was to make it as attractive as possible to move quickly.

AQuantive Debt

Microsoft took on $80 million in debt from AQuantive Inc. when it bought the Internet advertising company for $6 billion in August. Both the AQuantive acquisition and the proposed takeover of Sunnyvale, California-based Yahoo are part of Microsoft's effort to compete with Google in the $40 billion-a-year market for Internet search services and advertising.

Separately, Microsoft said it completed a package of fixes to its Windows Vista PC operating system. Many corporations wait to adopt new operating systems until the release of what's called Service Pack 1, Ballmer told analysts. The company also finished work on its new Windows system for running server computers.