Last week, Gilead Sciences (NASDAQ:GILD) announced that it was borrowing $3 billion. That's billion with a "B."

The company doesn't really need the money. It was sitting on $36.6 billion in cash, cash equivalents, and marketable securities at the end of the second quarter. That's more than enough to cover the $11.9 billion price tag to buy Kite Pharma (NASDAQ:KITE).

Nevertheless, Gilead decided to take on additional debt to fund part of the deal for Kite, likely for a couple of different reasons.

1. Those dreaded taxes

Gilead has a lot of cash and marketable securities sitting in its accounts. Like most companies, however, Gilead doesn't break down where its cash is held, but a large chunk is probably held overseas to avoid paying U.S. taxes.

The company could repatriate the cash back to the U.S. to pay for the Kite deal, but then it would have to pay taxes when it brought the cash back in. There's been talk of Congress establishing a repatriation tax holiday, or perhaps even changing the tax structure altogether so companies wouldn't need to hold cash overseas. It makes sense, then, for Gilead to wait and see if Congress can get its act together. The amount Gilead might save in taxes could be substantially more than the amount it'll pay in interest borrowing.

2. Flexibility to buy more

Even if Gilead has enough cash in the U.S. to pay for Kite outright, borrowing money now gives it more flexibility to pay for additional deals that might become available in the future. It doesn't even have to be an acquisition -- a licensing deal to help market a complementary product, which usually requires upfront payments, would be a good move.

Keeping some cash around could also be helpful, since Kite won't be adding to the earnings line anytime soon. Kite's first product, axicabtagene ciloleucel, should get Food and Drug Administration (FDA) approval around the same time as Gilead takes over the company later this year, but initial sales of axicabtagene ciloleucel won't cover the costs of developing the other drugs in Kite's extensive pipeline. Gilead's management said that Kite won't start adding to earnings until the fourth year after the acquisition.

Pen and magnifying glass atop a balance sheet.

Image source: Getty Images.

3. Cheap cash

Neither of the first two reasons would be enough to justify borrowing money to pay for the Kite acquisition if the cost of capital was high. Fortunately, with Gilead's strong cash flow and solid balance sheet, creditors are willing to loan Gilead cash for next to nothing. Of the full amount borrowed, $2 billion is at a floating interest rate 17 to 25 basis points higher than the three-month LIBOR (London InterBank Offered Rate), which currently stands at 1.33%, with the remaining $1 billion at a 1.85% fixed interest rate.

That's end-of-the-year-make-room-for-the-new-model car-loan cheap. And unlike a car loan, these notes aren't secured to anything -- although that's only relevant if Gilead couldn't pay its debt, which seems unlikely at this point.

Something to watch

While borrowing money to pay for part of the Kite acquisition makes a lot of sense, investors need to keep an eye on Gilead's debt, which has been climbing while its free cash flow (FCF) has fallen.

GILD Total Long Term Debt (Annual) Chart

Gilead data by YCharts.

Even with the FCF-to-debt ratio headed in the wrong direction, Gilead still has plenty of FCF to service its debts. Based on the first six months of this year, Gilead paid $530 million in interest while generating $6.2 billion in free cash flow. Even with dividends eating up about $1.4 billion, Gilead is still generating enough cash that it can still add to its nest egg -- or pay down debt if it chooses to.

Investors don't have anything to worry about at the moment, but should watch to make sure Gilead's debt doesn't get too out of control and its cash flow doesn't fall too much.

Brian Orelli has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has the following options: short October 2017 $86 calls on Gilead Sciences. The Motley Fool has a disclosure policy.