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Health & Fitness

What Microsoft and Verizon mean for you

The long Labor Day weekend is usually a relatively quiet time for the financial markets. Brokers are getting their last vacations, journalists are off, and most people are “tuned out,” trying to enjoy this last bit of summer. Thankfully, I am always looking for deals and stories that could have an impact on both the financial markets and your money – and we certainly have some!

The Verizon & Vodafone deal (covered on Saturday’s podcast), the third largest merger ever, is valued at approximately $130 billion, and will be financed by $61 billion in debt that is referred to as a “bridge loan.” Without over complicating the situation, a bridge loan is pretty much what it sounds like, a short-term lending facility (loan) that is in place for usually less than 1 year, until the parties in deal can secure permanent financing. The sheer size of both the deal and the bridge loan are newsworthy in and of themselves – staggering is an adjective I have seen used fairly regularly.

As if that wasn’t enough news in the telecommunication industry for one long weekend, another deal was announced overnight. Microsoft is purchasing the handset unit of Nokia for $5 billion as well rights to the mapping software and other patents for $2.2 billion. While smaller in absolute numbers than the Verizon deal, it has received headline coverage since it broke in the middle of night on Monday/Tuesday morning.

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There are a few points that I think should be analyzed when it comes to these two deals.

Microsoft

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This is the third major change announced since the end of June. The “One Microsoft” restructuring announced by Steve Ballmer, the resignation of Steve Ballmer in August, and now this acquisition indicate that Microsoft is aggressively attempting to rebrand itself. In acquiring a hardware manufacturer, it appears that the company is attempting to become a “self-sufficient” I.T. firm by controlling both the “hard” and “soft” sides of the product.

In press releases, the company (Microsoft) indicated that this purchase of Nokia’s handset business would give the new Microsoft operating systems greater flexibility and a stronger platform. In other words, Microsoft is preparing itself for a revamped foray into the handheld and tablet markets. As I stated originally in the post “Does Microsoft Still Matter,” this firm is still highly profitable, generates tremendous cash flows, and has an abundance of engineering talent. It would not be prudent to simply write them off as irrelevant.

The question that first came to mind when I saw this announcement very early this morning is, what is Microsoft trying to do? Speculation abounds, but I believe that, once you cut through all of the noise, it is actually a relatively straightforward idea. Microsoft realizes that the world is shifting away from PCs, and is heading more towards tablets and other handheld devices. The firm certainly has the software ability to continue its dominance. After all, who doesn’t use Microsoft Office? This acquisition gives them a platform to launch a rebranded and improved product line…no guarantee of success, but it will certainly be worth keeping an eye on.

Verizon

Let’s begin with the obvious. This deal is gargantuan is size. 6 investment banks are directly involved with establishing the bridge loan, with another half dozen or so involved in a support capacity. The chatter in the financial media this morning was that this deal was so big, and so long in the making, that the lead bankers would re-crunch the numbers every month to monitor the feasibility of the deal…and have been doing so since 2010.

This deal gives Verizon full control of its Wireless operations, which although it controlled 55%, it did not control fully. This is a boon for Verizon – its Wireless business is the fastest growing and most profitable of any of its business branches, and now all of those assets, growth, and profits belong exclusively to Verizon. It will be interesting to keep an eye on AT&T, Verizon’s primary competitor, to see how the firm reacts to this announcement.

Lastly, and this was discussed in this week’s podcast, is the possibility that the recent rise in interest rates played a role in making this deal happen when it did. Let’s examine the facts – the deal has been under careful consideration since 2010, as per the banks involved. The assets, profitability, and growth of Verizon Wireless operations has been a known quantity, and the management teams of both Verizon and Vodafone has remained largely intact during the last 5 years. So what has changed? Could the fact that interest rates have begun to rise, coupled with enormous debt financing ($61 billion don’t forget), have lent a hand in making this deal happen now? Food for thought.

Please let me know if you have any thoughts on these deals!

Happy Reading!

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