Microsoft Says to Borrow Money for Yahoo Deal

SEATTLE (Reuters) – Microsoft Corp said on Monday it may borrow money for the first time in its history tofund a portion of its $44.6 billion unsolicited offer for Yahoo Inc.

Microsoft also said it expects Yahoo’s board to agree to the dealquickly, but Yahoo said over the weekend that it expects to take "quitea bit of time" to weigh all of its strategic options includingremaining independent.

A source familiar with Yahoo’s strategy said it is considering a business alliance with Google Inc (GOOG.O: Quote, Profile, Research) to fend off Microsoft’s offer.

Microsoft Chief Financial Officer Chris Liddell said the softwarecompany may take on some debt to finance the cash portion of its 50-50stock and cash offer for Yahoo, instead of drawing down its entire $21billion cash pile.

"It’s likely we’re actually going to borrow for the first time,"said Liddell in an annual strategy meeting with analysts. "It’s goingto be a mixture of the cash we have on hand plus debt."

Liddell declined to say whether Microsoft was already buying Yahoostock on the open market. He also did not give any information on whatform of debt Microsoft will seek in the capital markets.

Microsoft made public on Friday its offer to pay Yahoo shareholderseither $31 in cash or 0.9509 of a share of Microsoft common stock. Thedeal aims to create a formidable number two to challenge Google Inc’s(GOOG.O: Quote, Profile, Research) dominance in Web search and digital advertising.

Analysts applauded Microsoft’s decision to take on debt.

"Microsoft can probably get a lower price of debt than equity," saidKim Caughey, senior analyst at Fort Pitt Capital Group. "I’ve oftenwondered why Microsoft sits on the pile of cash. It doesn’t make a lotof financial sense."

Liddell, when asked why Microsoft chose to dilute its stock insteadof making an all-cash offer, said analysts need to keep the offer inperspective with the $31 billion that Microsoft spent in share buybacksand dividends in fiscal 2007.

Shares of Microsoft rose 10 cents to $30.55 in morning Nasdaq trading, while Yahoo shares rose 59 cents to $28.97.

At the same meeting, Microsoft Chief Executive Steve Ballmer saidthe offer for Yahoo was generous and he expects Yahoo’s board andshareholders to agree to the buyout quickly.

"We trust the Yahoo board and the Yahoo shareholders will join withus quickly in deciding to move down an integrated path," Ballmer said.

Ballmer’s comments seem to run contrary to Yahoo’s statement that itmay take "quite a bit of time" to weigh its strategic options includingkeeping the company independent.

According to a source familiar with Yahoo’s strategy, the company ismulling a business alliance with Google Inc to rebuff Microsoft’sproposal. It has also received preliminary contacts from media,technology, telecommunications and financial companies, another sourceclose to Yahoo said.

Microsoft said combining with Yahoo would speed up the process ofbuilding a company capable of capturing 40 percent of the digitaladvertising market. Ballmer noted, however, that if the company wassuccessful in its bid, it would continue to invest in building thebusiness.

Redmond, Washington-based Microsoft emphasized that it expects tosee strong growth from most of its business units. Liddell said heexpects Microsoft’s revenue to grow at a double-digit percentage in thecoming fiscal year starting in July despite a potential U.S. economicslowdown.

Analysts, on average, forecast Microsoft’s revenue to grow 10percent to $66.4 billion in fiscal 2009 from an estimated $60.2 billionin the current year, according to Reuters Estimates.

Microsoft also said its first major update to Windows Vista wasreleased to manufacturing. Usually, large organizations wait for thefirst major update before deploying a new operating system.

(Additional reporting by Michele Gershberg in New York, editing by Dave Zimmerman)

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