Most investors do not think of tech companies as being debt-laden. Many became pubic by raising cash in IPOs over the last decade. Any debt they had was paid off with capital raised. The rest stayed on the balance sheet.
A study by Paul Kedrosky written up in Barron's paints a very different picture for some companies. Several large corporations, including Dell (NASDAQ: DELL), Take-Two Interactive (NASDAQ: TTWO), and Wipro (NYSE: WIT), have long-term debt-to-equity ratios of over 2x. For some big tech names, the figure is over 6x.
(Unfortunately, Barron's had to pull its piece because Paul's data appears to have been inaccurate.)
Under normal circumstances, this kind of data would be benign. But with the credit markets in crisis, refinancing debt on terms more favorable than firms have currently may be very difficult. Or, if the bond market gets very right, a company like Ingram Micro (NYSE: IM) could get in a real pinch.
There is another side to this. Cash-rich companies like Microsoft (NYSE: MSFT), Google (NASDAQ: GOOG), and Cisco Systems (NASDAQ: CSCO) may be able to shop for bargains. For them to pick up a company and pay its debt down may not be a significant problem.
More tech M&A this year? Almost certainly.
Douglas A. McIntyre is an editor at 247wallst.com.
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Reader Comments (Page 1 of 1)
1-19-2008 @ 2:08PM
XRenaissance said...
Where is the 2-to-1 debt to equity figure coming from on TTWO? It's not even remotely close to the figures in their balance sheet.
1-19-2008 @ 2:30PM
Fred said...
That's some story but his calculations are off by two decimal points.
1-19-2008 @ 2:31PM
doug mcintyre said...
Maybe you should look at the table linked to the story.
Doug McIntyre
1-19-2008 @ 2:46PM
Fred said...
Look at the balance sheets. His table has a bad formula or format. They all have very little LT debt.
1-20-2008 @ 9:43AM
Fred said...
You are wrong in thinking the Thompson provided debt/equity ratio is expressed as 2X or 6X. They are expressed as percentages. Others such as yahoo and nasdaq sites present them as whole numbers carried out three decimal points. Dell does NOT have LT debt of 6X equity or $25B.
1-24-2008 @ 9:07PM
XRenaissance said...
If the piece was pulled because the data was inaccurate, doesn't that mean it undermines the entire point of this post?