Ratings group, Moody’s has put Microsoft’s triple A credit rating on review for a possible downgrade after the software maker shocked investors with the agreed deal to buy LinkedIn for $US26.2 billion in cash.
In a statement, the ratings agency expressed concerns that Microsoft will fund the takeover through new debt in paying an agreed $US196 for each LinkedIn share which had closed at just over $US131 last Friday.
“Funding the acquisition entirely with debt, however, will increase Microsoft’s gross debt to EBITDA to approximately 2.0 times, in excess of 1.5 times leverage Moody’s has previously noted could pressure the rating,” according to analyst Richard Lane. Moody’s said although buying LinkedIn could provide meaningful benefits to Microsoft’s cloud-based services platform, it will also increase Microsoft’s leverage.
Aside from Microsoft, only ExxonMobil and Johnson & Johnson have managed to hang on to their triple A ratings at Moody’s Under the deal, LinkedIn will retain its brand, culture and independence and Jeff Weiner will remain chief executive, and will report to Microsoft CEO Satya Nadella.
The deal is expected to complete this calendar year.
This will be the third major acquisition Microsoft has made since 2011 when it bought Skype for $US8.5 billion, a move generally considered to be successful.
But it also has a history of overpaying for companies and delivering big write-downs and analysts wonder if LinkedIn is in the same mould with Microsoft offering a 50% premium (which is less than some of the other disasters in recent times).
Less successful though was the 2013 purchase of Nokia’s phone business for $US7.2 billion in 2013. Microsoft has since admitted it made a mistake and wrote down the acquisition last year for $US7.6 billion. It also wrote down the value of another purchase, Acquantive by $US6.2 billion in 2012. It had paid $US6.3 billion in 2007 an 85% premium.
Back in 2008, Microsoft tried to buy Yahoo for $US48 billion. Yahoo is presently in the process of breaking itself up and selling off its core internet business for $US4 to $US5 billion.
LinkedIn shares haven’t been performing this year. Even with the post bid rally of 46% LinkedIn’s shares are down 10% on the year and have been unable to recover the ground lost in a weak earnings announcement in February.
The purchase price of $US196 a share is 29% below LinkedIn’s all-time high of $US276 reached in February, 2015. Microsoft’s fell around 2% to $50.55, taking the loss over the past three months to around 5%.
