June 3 (IFR) - EMC Corp turned to the bond markets to raise money for the first time on Monday, selling US$5.5 billion in debt to help fund an expanded share buyback program.
Much as Apple did in April, data storage equipment maker EMC made its debut largely to benefit shareholders - in what may signal a wider shift in the technology sector.
The company last week decided to increase the size of its share buyback from $1 billion to $6 billion over the next three years.
It will also pay a dividend, of 10 cents a share, for the first time.
“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.
Tech companies have often insisted that they are unable to pay dividends or repurchase shares because most of their cash is located offshore.
But with Apple’s 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.”
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.
Apple undertook the largest corporate bond issue on record to fund its capital return scheme, and bankers expect NetApp will also now hit the debt capital markets.
“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%.
EMC shares closed down two cents Monday to $24.74. (Reporting by Danielle Robinson; Editing by Marc Carnegie)