Hey Microsoft, Use Debt Sale for M&A

This morning brought news that Microsoft(MSFT Quote) will be selling five, 10-, and 30-year debt as soon as perhaps later today. This makes a lot of sense. Microsoft has been overly conservative in how it's managed its business since its founding, due to the personal biases of Bill Gates.

Investors couldn't complain in the early days, but the last 10 years have been grim from a shareholder-return perspective. Even when you count the dividends you've received as a shareholder Redmond initiated that program in the early part of this decade, you still have seen total shareholder returns of almost -50% from holding Microsoft for 10 years -- far below the Nasdaq and Microsoft's chief competitors like IBM (IBM Quote), Oracle (ORCL Quote) and faster-growing Apple (AAPL Quote) and Google (GOOG Quote). That's depressing for Microsoft investors and employees alike.

From a capital structure perspective, Microsoft's antipathy toward debt has always puzzled investors. Here is a dominant franchise, with perhaps the most pristine balance sheet in the world and a remarkable cash-generating ability, and yet it still keeps an enormous amount of cash on its balance sheet and refuses to use debt.

There are two open questions regards this debt issuance announcement: (1) How much debt will they issue? and (2) How will they use it?

If Microsoft's history holds, the amount of debt issued through this will be modest. They've indicated that the offering will be "benchmark" size, which indicates at least $500 million. If you compare the debt-to-cash ratios of larger peers Oracle and IBM, Microsoft should be looking to issue much more than that. Oracle has an equal amount of cash and debt, implying that Microsoft should look at taking their debt load to $24 billion. IBM uses debt even more aggressively. IBM's debt-to-cash ratio implies that Microsoft could take on $60 billion in debt easily.