NEW YORK, June 7 (IFR) - EMC Corp followed in Apple's
footsteps this week with its first-ever bond issuance, a US$5.5
billion transaction aimed primarily at raising money for the
benefit of shareholders.
Bankers are betting the data storage equipment company
will not be the last to take the unusual step of issuing
debt for the prime purpose of paying for a higher dividend and
share buyback program.
The pressure is on a raft of maturing tech companies to get
serious about returning cash to shareholders, and now that Apple
has shown that it's possible to leverage a bulging
offshore cash pile by issuing debt agasint it, shareholders are
likely to push others to follow suit.
"Now that Apple has done its bond issue, we expect to see
debt issuance done more frequently for the purpose of returning
capital to shareholders," said Fitch senior analyst Jamie Rizzo.
"For any company not active (issuing debt to pay for capital
returns to shareholders), I think the equity side can now say
'if Apple is ok with doing it, then why not you?'"
In the past, tech companies argued they were unable to pay
dividends or repurchase shares because most of their cash was
But with Apple's record US$17 billion dollar deal coming
after demands from activist stockholders, many in the market
believe that argument is losing force.
"Probably the biggest trend in tech is a move by activists
getting into company stocks and agitating for change," Chet
Bozdog, global head of technology investment banking at Bank of
America Merrill Lynch, told IFR.
"Their view generally is that if the company doesn't have a
dividend or a buyback program and has limited debt, then it has
an inefficient capital structure - and therefore they can drive
shareholder value by forcing those companies to return capital."
TIME FOR CHANGE?
Tech companies have tended to insist that the (relatively)
small amount of cash that many keep onshore needs to be kept on
hand for acquisitions.
But the clamor from activist shareholders is increasingly
forcing the issue in corporate boardrooms.
David Einhorn and his powerful hedge fund Greenlight Capital
pestered Apple for months until the computer giant decided,
after seeing slower growth numbers, to embark on a US$60 billion
share buyback over the next few years.
Under pressure from private equity firm Elliott Management,
EMC rival NetApp said in May it would initiate a
quarterly dividend and increase its stock repurchase program to
$3 billion in the next three years.
Bankers expect NetApp will also now hit the debt capital
"We expect it to opportunistically look to bolster its
domestic cash balance later in the year," Barclays said in a
recent analyst report.
"We also expect the larger blue-chip tech companies [such as
Microsoft, Intel, Cisco] to opportunistically use issuance to
synthetically 'unlock' foreign cash holdings."
The sharp shift in Treasury yield rates over the past few
weeks means time is of the essence for those companies looking
to undertake a capital return program and fund it with bonds.
The rate rise increases the cost of funding and limits the
ability to take advantage of an arbitrage between the current
lower cost of issuing debt versus paying dividends on shares
they could otherwise buy back with the fund-raising.
"There is the obvious arbitrage there," said one head of
debt capital markets at a Wall Street bank.
"Why pay a dividend in the 3% to 5% range, when you can
issue bonds at 2% or less and buy back those shares?"
EMC raised its funds Monday across three tranches of debt -
a US$2.5 billion five-year bond at Treasuries plus 85 basis
points (bp) for a coupon of 1.875%; a US$2 billion seven-year at
T+115bp for a coupon of 2.650%; and a US$1 billion 10-year at
T+125bp for a coupon of 3.375%.
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