When $19 Billion isn't $19 Billion

There has been quite a bit of chatter in the last 48 hours about how Microsoft is courting the capital markets in preparation for taking on some debt as part of the proposed Yahoo! acquisition.  People are aghast that Microsoft, long insulated from the vagaries of the market by it's cash stockpile, would spend it's buffer to execute this transaction, and then charge up their corporate credit cards and go into debt to pay for Steve Balmer's newest ego-boosting spending spree.

The assumption is that there is $19B sitting in a checking account somewhere that just requires another $25.6B in financing to be able to consummate the transaction. Well, I'm sorry to tell everyone, but I'd suspect there is nowhere near that amount of money sitting idle to be spent on Yahoo!.

Large corporations like Microsoft have legal entities in Europe and Asia to allow them to operate under the tax base of those sovereigns, often with very little tax overhead due to concessions granted by the nations to encourage Microsoft to set up a job center in some economically-depressed area.  Now, in Microsoft's case, 60%+ of their revenue is from non-domestic operations.  That means that if the revenues are coming in to, say, London or Brussels from their European operation, they have a bank account there where those funds are cached.

They CAN repatriate those funds to the United States, to be sure, however the IRS has a nasty way of giving those earnings a 'repatriation haircut' on the way in to the tune of 20%+.  Better to let those funds sit in Europe and earn interest than take a big hit in repatriating.

So, expect that, of Microsoft's billions, perhaps half of it is unavailable to spend domestically on an acquisition, and Microsoft would face a peasant revolt of it's shareholders if it attempted to issue some more stock (increasing 'shares outstanding' the same way that the US Government loves to bloat the M3) to pay for the acquisition with MSFT  certificates.

With the economy faltering and interest rates coming down rapidly thanks to the belated gyrations of Mr Bernanke et al, there are genuine reasons why Microsoft would want to put some of it's vaunted quarterly excess cashflow to work servicing low-interest corporate debt, versus explaining to it's unhappy stockholders why the $19B isn't earning a competitive rate of return in a recession-happy stock market.  And leaving that $9.5B in Eurodollars in the bank in London just in case.