Microsoft faces Moody’s review on LinkedIn deal funding

Microsoft has enough cash to buy LinkedIn four times over. So why is it taking out a big loan to pay for its latest purchase? Maybe because it'll lower the technology giant's tax bill.

Microsoft will avoid having to pay a 35 per cent tax rate to repatriate cash from overseas accounts.

While it’s true that Microsoft has more than $100 billion in cash and cash equivalents, most of it is parked offshore. Bringing home any of it to fund the proposed $26.2 billion purchase, announced on Monday, would generate a tax bill.

That’s not the only benefit of borrowing. The company could also deduct interest payments, thus lowering its future US tax bill. So by financing the bulk of its purchase with debt, Microsoft could legally sidestep roughly $9 billion in US taxes this year, and save millions more in the years to come by using interest deductions to reduce its taxable income.

Awash with cash

“It’s an odd world where a company is awash in cash and chooses to make the acquisition with debts because they don’t want to pay tax,” said Robert McIntyre, executive director of Citizens for Tax Justice.

The company plans to finance the acquisition "primarily with new debt", Microsoft's chief financial officer Amy Hood said in a conference call on Monday announcing the deal, without specifying the amount it expects to borrow.

A Microsoft spokesman didn’t immediately respond to a request for comment. Companies prefer debt when rates are exceedingly low, as they are now. With its latest plan, Microsoft joins a procession of cash-rich US companies that have in recent years relied on leverage to sidestep US taxes.

In 2015, Apple, with more than $180 billion overseas, borrowed $6.5 billion to pay a dividend. Many chief executives and business analysts say the strategy amounts to good corporate governance and common sense. But financing the LinkedIn purchase with debt could leave Microsoft rich abroad and strapped in the US.

Rating under review

On Monday,

Moody's

Investors Service placed Microsoft’s “Aaa senior unsecured” rating under review for downgrade, citing the company’s debt and overseas cash hoard as factors.

Microsoft is already committed to pay the final $10 billion of a $40 billion share buyback programme this year. But the company has only $3 billion in cash in the US and would likely have to borrow to pay for the buyback, said Richard J Lane, a senior analyst for Moody's. The decision to add another $20 billion-plus of debt to buy LinkedIn could "contribute to ratings pressure", Mr Lane said.

With 97 per cent of its cash overseas, “Microsoft’s ability to support its existing capital allocation programme without further debt is limited”, the Moody’s report noted. S&P Global Ratings, by contrast, affirmed Microsoft’s AAA rating. – (Bloomberg)