Oracle (Nasdaq: ORCL ) announced plans to offer $3.25 billion in new debt yesterday, at a slight premium to long-term Treasury bond rates. The database king will use the new debt to pay off old obligations, Bloomberg Businessweek reports.
Debt offerings frighten me, particularly when a stock I own starts going into hock. Oracle has been a part of our family portfolio since 2004, and it remains one of my largest individual positions.
On the surface, this offering looks more troubling than most. Bloomberg says its data shows that Oracle is issuing more 30-year bonds than it ever has, which makes me wonder whether the company lacks all the cash it needs to satisfy its acquisitive ambitions. A balance sheet cleanse may be next on CEO Larry Ellison's agenda.
Alternately, he might be planning still more buys. If so, this latest round of refinancing must be aimed at giving Oracle time and liquidity. Most of the new notes won't come due for another 30 years.
JPMorgan Chase (NYSE: JPM ) and Bank of America (NYSE: BAC ) are both helping manage the sale. This is somewhat ironic, because Oracle seems to be mimicking their strategy. Both banks are borrowing from the Fed at historically low rates, while charging borrowers a premium. The gulf between produces profits. Oracle is borrowing cheaply to retire rivals, then earning high returns on the capital invested.
How high? According to Capital IQ, Oracle has earned more than 15% per year on available capital since 2005, while most of its debt costs less than 6% per annum.
Oracle's debt offering also comes at a time when comparable techies such as Microsoft (Nasdaq: MSFT ) and Google (Nasdaq: GOOG ) are mostly sitting on mountains of cash. Among the majors, only IBM (NYSE: IBM ) is within spitting distance of the database king on this issue. Big Blue has a history of borrowing to buy back shares.
Yet Ellison needn't worry that he lacks company in taking on debt. History and the numbers -- namely, a favorable spread between the cost and return on capital -- back up Oracle's decision to keep borrowing.
Now it's your turn to weigh in. Is Larry Ellison crazy for taking on more debt? Let the debate begin in the comments box below.