By Jessica Hodgson
Of DOW JONES NEWSWIRES
SAN FRANCISCO (Dow Jones)--Microsoft Corp. (MSFT), once a rebellious teen, has entered into full adulthood with its first-ever sale Monday of long-term debt, the latest signal of the 34-year-old company's maturity.
Microsoft, not historically shy of spending its own cash flow, is now taking advantage of interested debt markets and its AAA debt rating to raise money easily and cheaply, and then presumably using that money for boring, shareholder-friendly moves like buying back stock.
The move is akin to a freespending adult deciding to settle down by buying a first home, instead of going on another high-priced vacation that brings short-term pleasure but no long-term growth.
"Microsoft has gone from being a growth company to being a mature company," said Jay Anand, a professor of corporate strategy at the Fisher College of Business, Ohio State University.
Shareholders have long given up on Microsoft as a high-flying tech growth company. For the past seven years, Microsoft shares have rarely been above $30, except for a five-month stretch at the end of 2007 and beginning of 2008. And, since late October, they have struggled to get above $20.
That is in sharp contrast to the stock's nearly nonstop rise between its initial public offering in 1986 to 2000, when it peaked at nearly $60 on a split-adjusted basis.
The tech bubble burst earlier this decade, and Microsoft shares slid. The Redmond, Wash., company took a step toward maturity in 2003, when it began to pay a dividend - typical behavior for companies no longer expecting rapid revenue and stock price growth.
While Microsoft hasn't delivered returns in its stock price, the company does generate cash. Microsoft registered $60 billion in revenue in 2008 and has more than $25 billion on its balance sheet.
That's why it is so notable that Microsoft has said it plans to use the proceeds from the debt sale for general corporate purposes, including buying back stock, a shareholder-friendly move because it could improve Microsoft's sagging per-share earnings and stock price.
Microsoft shares are cheap. They trade at a valuation - 11.4 times current earnings - that is notably below peers Oracle Corp. (ORCL), 13.3; Adobe Systems Inc. (ADBE), 19.2; and Google Inc. (GOOG), 21.3.
While selling cheap debt to buy back stock makes financial sense, it doesn't solve Microsoft's fundamental problems - last month, Microsoft posted a 32% drop in net profit and the first quarterly revenue decline in its 23-year history as a publicly traded company. The move, though, does buy Microsoft some time.
The company's key franchises, the Windows operating system and the Office business tools suites, have high market share - Windows is on over 90% of the world's computers. But Microsoft has seen increasing challenges to its dominance in recent years.
The largely negative critical reaction to Windows Vista, the current version of the operating system, underscored that the company can't automatically rely on its customers to upgrade whenever a new version of its operating system software comes out.
Meanwhile, competitors such as Google, Apple Inc. (AAPL) Salesforce.com Inc. (CRM) and Amazon.com Inc. (AMZN), all of whom offer alternatives to the Microsoft operating system and tools, are gaining traction among consumers and corporate customers.
For those reasons, some suspect Microsoft's debt offering may be a prelude to a more significant move to improve the company's momentum.
Walter Pritchard, an analyst with Cowen & Co., thinks Microsoft is "testing the water", and he can't rule out a larger debt sale later that could be used to fund acquisitions. German software maker SAP AG (SAP) and Yahoo Inc. (YHOO) have been mentioned as possible targets.
But at the moment, Pritchard says, the move should be seen as Microsoft "growing up from a capital expenditure perspective," like the rest of the software industry.
"[Software is] not typically a very capex intensive business, and there's historically been an attitude that debt is bad," he said. But software peers, including Oracle and Adobe Systems, have become more comfortable with debt in recent years.
-By Jessica Hodgson, Dow Jones Newswires; 415-439-6455; jessica.hodgson@dowjones.com
