Why Is Microsoft Resorting to Debt if It Has Cash to Buy LinkedIn?

Microsoft holds $108.3 billion worth of earnings overseas, which accounts for 4.7% of the total overseas cash held by S&P 500 companies.

Anne Shields - Author

Nov. 20 2020, Updated 1:21 p.m. ET

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Technology sector’s cash exceeds debt

In the prior part of the series, we discussed Microsoft’s (MSFT) latest acquisition of LinkedIn (LNKD). Microsoft announced that it would use debt to finance LinkedIn’s acquisition. Why does Microsoft intend to raise debt when it has enough cash to make four acquisitions of a similar nature?

According to a Credit Suisse report released in March 2016, S&P 500 (VOO) companies have at least $750 billion in cash and $2.3 trillion in earnings parked outside the US. Out of the $750 billion in cash parked overseas, IT (Information Technology) firms account for 53% of the total. Moreover, the technology sector was the only sector in the S&P 500 that had more cash than debt per share in 2015.

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Microsoft has more cash overseas than other S&P 500 companies

Microsoft holds $108.3 billion worth of earnings overseas, which accounts for 4.7% of the total overseas cash held by S&P 500 companies, as the above chart shows. Microsoft has $94.4 billion in cash parked overseas, which accounts for 12.6% of the S&P 500 companies’ total. Apple (AAPL), IBM (IBM), Google (GOOG) (GOOGL), and Cisco (CSCO) are other leading technology companies that made the top ten list. However, Microsoft’s position in overseas earnings and cash makes it more vulnerable to currency fluctuations, especially dollar (UUP) fluctuations, than its peers.

LinkedIn’s acquisition will lower Microsoft’s tax bill

A plausible reason why Microsoft plans to acquire LinkedIn with debt is to lessen its tax bill. If Microsoft uses its cash parked overseas, it would have to pay a 35% tax on repatriation of cash from overseas accounts. Thus, if it uses cash to fund the proposed $26.2 billion LinkedIn buyout, it would generate a hefty tax bill.

In the current scenario, interest rates are low, which might have prompted Microsoft to take the debt route and rely on leverage to avoid taxes. However, Microsoft isn’t the only tech company to do that. Apple (AAPL), with over $180 billion in cash parked overseas, borrowed $6.5 billion in 2015 to pay dividends.

By raising debt to finance the acquisition, the company could deduct interest payments, which will further lower its US tax bill. Moreover, in the future, Microsoft could save millions by using interest deductions to reduce its taxable income.

In the words of Robert McIntyre, executive director of Citizens for Tax Justice, “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.”


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