Microsoft (NSDQ: MSFT) is known for building itself from within rather than borrowing money to make acquisitions. That’s why its SEC filing this morning saying that it may issue up to $4 billion in debt created a stir in investment and media circles. Is Microsoft about to go on a buying binge? We doubt it, but the filing raises an intriguing question: Using a combination of cash, debt and stock, how much could Microsoft spend on acquisitions before its balance sheet started to resemble those of its more-leveraged peers? Put another way, which and how many companies could Microsoft buy with its substantial resources (the company has lots of cash and almost no debt) and still remain fiscally sound in relation to its competitors?
Most of Microsoft’s competitors (Oracle, IBM and a few others) are leveraged at about 1.0 to 1.5 times net debt/EBITDA (earnings before interest, taxes, depreciation and amortization), a common ratio for evaluating the health of a company’s balance sheet. If Microsoft were to acquire companies at a pretty rich multiple of 10 times EBITDA and pay for those acquisitions 50 percent in debt, 25 percent in cash, and 25 percent in stock, it could make about $100 billion in acquisitions before its leverage multiple grew to 1.4 times. That means, it could buy all of the following companies:
–The Walt Disney (NYSE: DIS) Company ($45 billion)
–Time Warner (NYSE: TWX) ($30 billion)
–Yahoo (NSDQ: YHOO) ($22 billion)
–Facebook ($4 billion)
Note to readers: This is a purely academic exercise. It doesn’t take into account whether there is any kind of strategic fit between Microsoft and these companies, or the likelihood that this would ever happen. Still, it speaks volumes about Microsoft’s tremendous buying power.