Microsoft Issues Bonds, Contemplates Drinking Own Urine

Microsoft has completed a new bond issue, its first ever, for $3.75 billion. The company says they have no real plans for the money, though the move has sparked speculation about possible acquisitions. They say they're just taking advantage of favorable market conditions.

Apparently some analysts think that the most likely use of the money would be a stock buyback, where the company buys its own stock, attempting to push prices up. Microsoft stock has been hit by the falling market, along with everything else. The stock was at $30 early in 2008, and it fell below $15 by March 2009.

The stock buyback is a corporate strategy that is emblematic of the first decade of the 21st century. Stock buybacks exploded during that time, as they did during the end of the 1990s. Of course, most buybacks are done with borrowed money. The tactic is considered an acceptable way of paying out profits to shareholders.

A company buying its own stock with borrowed money is doing something as sensible as drinking your own urine. At best, it keeps you alive in the desert. But it sure won't make you thrive. Borrowing money imposes an economic logic: you must pay back more than you borrowed. So if you're borrowing to invest, you'd better make sure that what you invest in has a higher return than the interest rate, plus some for inflation, and a normal rate of profit. How does a share buyback accomplish any growth whatsoever? If all goes well, and the stock price remains high, (far from certain in this volatile market) how exactly does that insure the future growth of Microsoft?

The real motivation for the skyrocketing use of buybacks is so that management can give themselves fat bonuses covertly, in the name of shareholder value. Now that the credit teat has been taken away, my guess is that we'll see far fewer share buybacks by corporations. It was a strategy of the bubble years, one that is doomed to extinction.