6-16-16 – Microsoft and Linked In

by John McClaughry

Last week Microsoft announced it would buy Linked In for $26 billion. According to the Wall Street Journal, Microsoft paying $196 a share for the social-media firm, a 50% premium over the previous day’s  closing price. Microsoft is shelling out roughly seven times LinkedIn’s annual revenues for a business that isn’t profitable and has seen slowing growth despite its 433 million users.

The Journal wrote  “government policies are shaping the financing of the LinkedIn deal. Microsoft’s balance sheet holds more than $105 billion in cash, cash equivalents and short-term investments. You would think it would pay cash for LinkedIn”.

“But the U.S. has the industrialized world’s highest corporate income tax rate and insists on taxing foreign profits when they return to the U.S. So according to Microsoft…, nearly $103 billion of the cash was held “by our foreign subsidiaries and would be subject to material repatriation tax effects.” With the Fed still holding interest rates near zero, Microsoft plans to borrow most or all the cash to complete the purchase.”

Let’s get this straight. Microsoft has $105 billion in cash, but $103 billion of it is held in offshore locations because it would cost Microsoft $36 Billion in tax to bring their own cash home and invest it in America. So they make a $26 Billion acquisition and finance it with debt – because the Federal Reserve is keeping interest rates low.

This makes sense for Microsoft, but it’s crazy for America.

- John McClaughry is the founder and vice president of the Ethan Allen Institute. 

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