Moody's Places Microsoft (MSFT) Ratings on Review for Downgrade

Moody's Investors Service ("Moody's") placed the Aaa senior unsecured rating of Microsoft Corporation (Nasdaq: MSFT) under review for downgrade following the announcement today that the company has agreed to buy LinkedIn Corporation for $26.2 billion in cash. Both company's boards of directors have approved the transaction, and, pending LinkedIn shareholder and regulatory approvals, the transaction is expected to close around calendar year-end 2016. LinkedIn founder Reid Hoffman, a controlling shareholder with 11% of outstanding shares and about 53% of voting power as of the end of 2015, announced he supports the transaction. Microsoft's short term rating is affirmed and is not under review.

RATINGS RATIONALE

The acquisition could provide meaningful benefits to the ecosystem surrounding Microsoft's cloud based services platform and LinkedIn's network that connects professionals, recruiters and companies. "Funding the acquisition entirely with debt, however, will increase Microsoft's gross debt to EBITDA to approximately 2.0 times, in excess of 1.5 times leverage Moody's has previously noted could pressure the rating" said Moody's Richard Lane.

Moody's review will focus on the strategic fit and monetization opportunities of LinkedIn with Microsoft's software offerings. The review will also consider Microsoft's plan, if any, to reduce and sustain gross leverage at or below 1.5 times while maintaining a significant net cash position. An additional consideration will be Microsoft's capital allocation plans and the potential need to raise debt to support shareholder returns. A potential downgrade would likely be limited to one notch.

LinkedIn has approximately $3.2 billion of revenue and $842 million of EBITDA excluding stock-based compensation. While small compared to Microsoft's $87 billion of revenue and $31.4 billion of EBITDA, the price represents a full valuation for LinkedIn (about 6.2x projected 2017 revenue and 16x EBITDA).

Microsoft is in the process of completing a share buyback program, with approximately $10 billion remaining by the end of December 2016. Notwithstanding Microsoft's significant balance sheet liquidity ($106 billion), a large portion of its cash (97%) and a majority of free cash flow generation occurs internationally. Similar to many global technology companies, absent US tax reform or the implementation of sustainable legal organization and/or tax strategies that shift the geographic recognition of revenue, profit, and cash flow, Microsoft's ability to support its existing capital allocation program without raising further debt is limited. Particularly in the context of the proposed acquisition, further debt issuance to support capital returns would contribute to ratings pressure.

Ratings under review for downgrade:

Issuer rating- Aaa

Senior unsecured rating - Aaa

Ratings affirmed:

Prime-1 short term rating

The principal methodology used in these ratings was Software Industry published in December 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

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