Microsoft to buy back $40 billion stock and raise $6 billion debt

Microsoft, seeking to revive the price of its shares, which had slumped 30 per cent this year, said it planned to buy back as much as $40 billion in stock after having already completed a previous $40-billion buyout. It also said  it would raise dividend and issue its first $2 billion commercial paper.

This buyout programme will run through the next five years and at yesterday's price of $25.16 a share, the software giant could potentially buyback 16 per cent of its shares from investors thereby reducing the dividend payouts. It has returned more than $115 billion to investors over the past five years in repurchases and dividends.

The company started paying annual dividends to shareholders in 2003 and and has madee a rare special dividend payment of $32 billion under shareholder pressure.

Since the third quarter of 2004, Microsoft has been the second largest purchaser of its own shares, with about $67 billion in repurchases, excluding the planned $40 billion purchase now.

In addition, its board of directors authorised a $2 billion commercial paper programme, as part of a bigger $6 billion of debt, which Microsoft said it might use to fund the buyback or for other general corporate purposes.

Moody's Investors Service and Standard & Poor's Rating Services both assigned Microsoft's debt their highest ratings. Microsoft is one of only six non-financial corporate debt issuers that currently have AAA corporate-credit ratings from Standard & Poor's,  a rare feat , as it requires an extraordinary combination of qualities that are shared by few others companies.

"The company's strong credit quality coupled with investors' current appetite for high quality paper provides a unique opportunity for the company to establish it's first-ever commercial paper programme and enhance its capital structure," said George Zinn, Microsoft's treasurer in a statement.

Microsoft, which has $23.7 billion in cash and short-term investments on hand, has always shied away from taking on debt to fund day-to-day operations, acquisitions and stock buybacks although IBM and Oracle have done so.

Taking on debt makes sense for Microsoft as the interest outflow would be tax-deductible, thereby increasing its profit.

In February this year, Microsoft planned its first ever debt to finance its failed acquisition of Yahoo. The share price had seen a steady decline and was down 30 per cent since the beginning of the year and did not recover from a sharp sell-off when the company announced its intention to buy Yahoo for $45 billion.

Since shareholders are apprehensive of the investment climate in the current situation and see their value of their companies declining, large corporations have initiated buybacks which have already begun by top PC maker Hewlett-Packard announcing to repurchase up to $8 billion of its own stock followed by Nike, the biggest maker of athletic shoes, said it will buy back up to $5 billion of its shares.

When the market peaked in the third quarter of 2007, almost $172 billion in shares were repurchased making to the one-year record of $589 billion in shares repurchased in 2007, with financial companies being the biggest contributor, accounting for 20 per cent of the buybacks in 2007.

In the first quarter buybacks were $113.90 billion and fell to less than $100 billion in the second quarter. This graph is likely to get worse in the third quarter.