The Microsoft Debt Offering You Can’t Buy (MSFT)

Microsoft Corp. (NASDAQ: MSFT) is selling $1.15 billion worth of convertible senior notes, but chances are that you won’t be able to participate in this offering even if you wanted to. The notes will be due in 2013, but these are a private placement (144A)that will be available only to “qualified institutional buyers.”  The company will also grant the initial purchasers a 13-day option rather than a 30-day option to purchase up to $100 million in additional convertible notes as an over-allotment option.

The offering summary notes that before to March 15, 2013, the convertible notes will be convertible into cash only in certain instances, or if applicable can be converted into cash, common shares, or a combination of cash and shares at Microsoft’s election.  Starting on March 15, 2013 and thereafter, the convertible notes will be convertible at any time.

This is usually a flag for some offerings, but with a size of barely $1 billion versus a $200+ billion market cap it should not matter.  It also shouldn’t matter that this is effectively debt used to repay short-term debt.  Microsoft expects to enter into capped call transactions with certain option counterparties, which are also expected to be initial purchasers of the convertible notes.  Capped call transactions are generally expected to reduce potential dilution upon conversion of the convertible notes, although in larger deals that are a higher percentage of the total float they can also act as trading curbs to the common stock.

Microsoft also said that it will repurchase common shares at or after the convertible notes price.  Those share purchases can be made in privately negotiated transactions or via open market transactions.  Bill Gates sells 2 million shares routinely at a time in his share sale plan, so maybe he is the “negotiated transaction”… But that is another story.

JON C. OGG