Microsoft’s Top Moody’s Rating Imperiled by LinkedIn Deal

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Did Microsoft Pay Too Much for LinkedIn?

Microsoft Corp.’s membership in one of the most exclusive clubs in the world of finance may be endangered as it pursues a $26.2 billion purchase of LinkedIn Corp.

The company’s pristine credit rating, one of just two handed out to U.S. corporations, could take a hit as Microsoft plans to borrow to fund one of the largest deals in the technology industry on top of issuing debt to complete its $40 billion share-repurchase program by the end of the year. Moody’s Investors Service said it may cut the company’s Aaa ranking, according to a statement from the credit grader on Monday.

Moody’s said a downgrade would probably reduce the rating by one level to Aa1.

“Particularly in the context of the proposed acquisition, further debt issuance to support capital returns would contribute to ratings pressure,” Richard J. Lane, a Moody’s analyst said in the statement.

The acquisition could benefit Microsoft’s cloud-based services platform and LinkedIn’s professional network, but funding the deal entirely with borrowings will increase debt to about two times earnings before interest, taxes, depreciation and amortization, which could put pressure on the rating, according to Moody’s.

S&P Rating

S&P Global Ratings isn’t considering cutting Microsoft’s AAA rating. The credit grader said in statement on Monday it believes Microsoft will “remain committed to maintaining high credit quality” by sustaining its cash.

“We’ve looked at the deal and there is no change to the rating," S&P analyst David Tsui, said in an interview. “When you have more than $100 billion of cash, it’s tough to ignore that."

The affirmation of the rating also includes the expectation that the company will continue to be conservative and will dial back some of its share-buyback initiatives to maintain its superior cash balance, he said.

The tech giant has more than $105 billion of cash on hand and $46 billion of outstanding borrowings, according to data compiled by Bloomberg. Microsoft has already indicated it will fund the deal primarily through the sale of new debt. Given its "shareholder returns and relatively low U.S. liquidity," the company may fund the entire deal with new debt, according to research firm CreditSights Inc.

Johnson & Johnson is the only other company to enjoy a top rating after Standard & Poor’s lowered Exxon Mobil Corp.’s debt ranking in April.