Steve Ballmer hasn’t persuaded Yahoo Inc.’s board of the merits of Microsoft Corp.’s takeover offer. The software giant’s boss has also done a poor job of persuading his own shareholders that the cash-and-stock deal makes sense.
Microsoft made an unsolicited $41.6 billion (Rs1.6 trillion) cash and stock offer for Yahoo. The software group is offering $31 in cash, or 0.9509 shares of Microsoft, for each share of Yahoo. The maximum amount of cash is 50% of the total consideration. Microsoft’s market capitalization has shrunk by $43 billion since it made the offer. An all-cash deal could help win over both sides.
Microsoft’s deal was initially worth $44.6 billion. The decline in its stock has cut that to about $41 billion. It could, of course, offer a slight premium to that amount. But if Microsoft plunks down the original $44.6 billion, offering cash in lieu of shares—and financing that part of the deal entirely with debt—it might help to cheer up its shareholders due to the tax benefit involved. Meanwhile, Yahoo’s shareholders might prefer getting cash, rather than taking a bet on Microsoft’s share performance.
Microsoft currently has no debt. In fact, it has a large pile of cash sitting on its balance sheet. This doesn’t look like an appropriate capital structure for a company that has a near-monopoly and generates a prodigious amount of cash. Indeed, Microsoft already plans to issue debt to fund a substantial part of the existing cash component of its offer.
Funding the entire acquisition with debt wouldn’t be much of a strain. The combined company should generate over $30 billion a year in Ebitda (earnings before interest, taxes, depreciation and amortization). Microsoft probably won’t receive an AAA rating, but it would come close. There shouldn’t be a problem placing the debt either, given the paucity of new, high-quality corporate issues.
And the tax savings would be substantial. Assume Microsoft would have to pay a 4.75% annual coupon—roughly in line with similar credits. The annual interest payments on the additional debt would be about $1 billion. The current value to shareholders of the future tax savings would be about $3 billion. That might help to mollify Ballmer’s unhappy investors at least a bit.