Behind the spotlight, debt financing remains a significant driver of technology transactions
Last week, Microsoft acquired LinkedIn, the social media platform geared towards professional networks. The acquisition was impressive on its own, but even more so for the price: Microsoft spent a whopping $26.2 billion on the purchase.
One of the aspects that has been written about in the press is why Microsoft, who has a reported $105 billion in cash reserves according to the New York Times, are choosing to finance the transaction primarily by issuing new debt. While some of the rationale behind issuing debt is surely linked to it being a more tax efficient manner to finance the acquisition that saves Microsoft repatriating offshore cash, it is only part of the reason. The complete answer boils down to the cost of capital and the fact that Microsoft is as solid an issuer as you will find. (Microsoft is one of only two non-financial companies worldwide that still hold a AAA S&P rating.) And, with the recent announcement from the U.S. Federal Reserve that interest rates will remain low, a bond deal will, in all likelihood, never be a less expensive endeavour for Microsoft.
While we constantly hear about financings in the context of equity deals, raising funds through the issuance of debt is an increasingly common way to finance large-scale acquisitions and projects in the technology sector. Uber, for example, recently raised $3.5 billion from Saudi Arabia’s sovereign-wealth fund, is also said to be arranging a loan of between $1 billion and $2 billion in a deal with Morgan Stanley and Barclays PLC.
In China, this trend continues: Didi Chuxing, the Chinese-based competitor to Uber, announced this week that it had raised $4.5 billion in a recent fundraising round, complemented by a $2.5-billion loan from China Merchants Bank and a $300-million loan from China Life, the largest insurer in the country. The impressive amount of leverage begets the Chinese company’s equally impressive valuation: Didi Chuxing has been reportedly valued at $28 billion.
A favourable lending environment provides a welcome advantage for the technology sector. What the availability of inexpensive financing means is that companies, both new and old, are able to access the capital they need to grow and execute their plans. While the details of an acquisition, or how it is going to be financed, might not catch the attention of many, it’s important to highlight the importance of fixed-income financing, whether in the form of bonds or debentures — even in the technology sector where we don’t usually associate the largest capital market in the world to the most innovative and exciting companies today. What Microsoft, Uber, and Didi Chuxing show us is that underpinning our technological advances some things, like raising capital through debt, are still valuable and widely used.