If you were Microsoft and the sponsors of an LBO came to you and said, “we have about $17bn in debt to place, do you want $2bn of it,” would you say yes? Let’s say you’d say yes: would you demand a higher or lower interest rate for it than everyone else?
The Dell deal is pretty new and soon we’ll have a Background of the Merger to chew over – and, y’know, actual deal docs – but for now the most informative reporting seems to be this Journal story and it’s … sort of odd. Here is Microsoft’s involvement:
Between Silver Lake and Mr. Dell, the buyout group felt it could arrange for cash and loans on its own. The choice was between taking on $2 billion more in high-yield debt or bringing in Microsoft as a “passive debt investor” who would get no board seats or governance rights, but would be “emotionally and financially committed” to Dell’s future, a person said. Microsoft and Dell already are partners, but the $2 billion debt was aimed at creating a closer partnership between the two within an existing commercial agreement, the person and others said. Microsoft’s $2 billion note is a multi-year instrument with an attractive interest rate, one of the people said.
I don’t know what any of those words mean! The concept of Microsoft being “emotionally committed” to anything particularly boggles me. (It may have something to do with supporting “the long term success of the entire PC ecosystem” without ticking off other manufacturers by taking an equity stake in Dell.)
Also, I don’t know what “attractive interest rate” means. This is not uncommon with me, since sort of by definition an interest rate will be attractive to a lender to the exact extent that it is unattractive to the borrower and vice versa, and the answer isn’t intuitive here: cementing a relationship is probably valuable for both sides, but if you had to guess you’d probably say that Microsoft has more that Dell wants than the reverse. Nonetheless I gather that here it means “a low interest rate”: despite anchoring the deal, and thus taking much more risk than the public investors who will be buying Dell LBO debt in a few months, Microsoft seems to be getting worse economics than those investors.1
Microsoft may not be the cheapest debt source, though. The announcement notes that financing will come from
cash and equity contributed by Mr. Dell, cash funded by investment funds affiliated with Silver Lake, cash invested by an investment fund affiliated with MSD Management, L.P., a $2 billion loan from Microsoft, rollover of existing debt, as well as debt financing that has been committed by BofA Merrill Lynch, Barclays, Credit Suisse and RBC Capital Markets (in alphabetical order),2 and cash on hand.
Poor rollover of existing debt!
Since I know how seriously everyone takes the ratings agencies I’ll point out that Dell was A2/A- yesterday; Moody’s seems to have already cut to Baa1, Fitch to BB+, and S&P has warned of “a corporate credit rating outcome likely to be no higher than double-B, and perhaps in the B category.” That chart looks BB-ish to me.
Here is how Microsoft invests its scads of spare cash:
Cash, cash equivalents, and short-term investments totaled $68.3 billion as of December 31, 2012, compared with $63.0 billion as of June 30, 2012. … Our short-term investments are primarily to facilitate liquidity and for capital preservation. They consist predominantly of highly liquid investment grade fixed-income securities, diversified among industries and individual issuers. … The credit risk and average maturity of our fixed-income portfolio are managed to achieve economic returns that correlate to certain fixed-income indices.
You can see how getting a BB-area yield on $2bn of bonds concentrated in an industry that Microsoft knows well, and a company that Microsoft is poised and incentivized to help, would be attractive to the terribly, terribly bored people in Microsoft’s treasury.3 And you could see how that might nonetheless be off-limits to them, what with that mandate focused on highly liquid investment grade bonds rather than LBO junk. And you could see how committing up-front, as some sort of goofy partnership, might seem to make more sense to Microsoft than just buying Dell debt alongside everyone else. Even if it means getting a worse deal.
Speaking of worse deals, this – again from the Journal – is interesting:
The buyout group initially offered a price in the $12-per-share range, but was rebuffed multiple times by Dell directors, who were sensitive to perceptions of potential conflict given Mr. Dell’s involvement, and determined to secure the highest offer, people familiar with the matter said. Silver Lake felt that it couldn’t make the math work above a per-share price of $13-and-change, people familiar with the matter said. To help make up the difference, Mr. Dell rolled in his 15.7% stake at a discount to the final $13.65 price, they added.
Silver Lake, like whoever eventually buys the public Dell buyout bonds, was making an economic trade, and for them it stopped out at $13.65. Michael Dell … well, he’s emotionally committed. His name’s on the door. So why shouldn’t Silver Lake ask him, too, to pitch in to improve their economics?
Silver Lake’s Bidding for Dell Started at $12 [Deal Journal]
Microsoft Loan Is Said to Help Dell While Avoiding Favoritism [Bloomberg]
1. Maybe I’m wrong; we’ll find out in a few days I guess when the docs are filed. If I’m wrong, though: why would Silver Lake take worse economics on the MSFT loan than it can get in the market?
2. Tee-hee! But, real question: let’s say the fees for that committed financing come to, I dunno, $100 million for each of the four named arrangers? (Right? It’s a fuckload, anyway.) If you’re Credit Suisse, how much is that “(in alphabetical order)” worth to you? Would you delete it if you got $101mm in fees and BAML only got $99mm?a If you’re BAML, would you take that deal? If you’re Barclays, how hard do you argue that “Barclays” is before “BofA Merrill Lynch” in the alphabet? And: how many person-hours were spent hashing this out? At like 2 in the morning before announcing a $24bn LBO?
I just … I love that. It’s the best. I get that some people don’t like the financial industry or whatever, but that: that is the best.
a. Absolutely guarantee you that this sort of deal has been proposed at least once, though probably not on this particular deal.
3. I exaggerate their boredom; with $60+bn to manage I’m sure they find ways to amuse themselves matching certain investment-grade indices. Don’t worry about them, they’ll be fine.