San Francisco - Cisco Systems, which used cash and stock to purchase more than 90 companies in the past decade, will sell notes for the first time to fund the $6.9 billion (R42 billion) acquisition of Scientific-Atlanta.
Cisco, the world's biggest maker of data networking equipment, planned to sell $5.5 billion of three-year floating-rate notes and five- and 10-year fixed-rate debt, the company said on Friday.
Citigroup, JPMorgan Chase, Merrill Lynch and Morgan Stanley are managing the deal. The sale marks a rare foray by a technology company into debt markets. A jump in mergers and acquisitions is driving more companies to sell debt, pushing bond sales to a record $667 billion in 2005.
"A pick-up in bond issuance is being driven by merger and acquisition financing activity," said Suneel Kamlani, the global head of debt capital markets at UBS. "Companies are starting to releverage for capital expenditures or acquisitions."
The investment-grade notes will be rated A+ by Standard & Poor's (S&P) and A1 by Moody's Investors Service, the fifth-highest by each company.
The S&P rating is in line with other technology companies, such as Intel, the world's biggest computer chip maker, and IBM, the top computer services company.
Cisco agreed in November to buy Scientific-Atlanta, the second-biggest US maker of cable television set top boxes, to enter the expanding market for internet television.
The deal is expected to close this quarter after shareholders approved it last week. It is the most Cisco has paid for a company since buying Cerent for $7.29 billion in stock in November 1999. Cisco's most active year was 2000, when it acquired 26 companies.
Cisco shares peaked in March 2000, making it the biggest US company by stock market value, and have since fallen by three-quarters. That makes it more difficult to use stock when buying other companies and increases the need for loans, according to S&P credit analyst Bruce Hyman.
"At $50 to $60 a share, that was probably the right currency to buy high-flying tech companies," said Hyman. "For companies that are maturing, sometimes debt is the right currency."
Cisco shares rose 21c to $19.76 on Friday. The Cisco debt sale comes a month after Oracle sold the most debt of any company since March 2004.
The software maker sold bonds for the first time since 1997 after spending $18 billion on software acquisitions last year. Still, this may not signify a trend, according to Moody's analyst Richard Lane, because "there is a high level of business risk inherent to technology. Oracle and Cisco are substantial companies with very strong positions in their markets and each had specific events that were driving them to issue debt."
Oracle's 6.91 percent note due in 2007 fell 0.9c on Wednesday, when it last traded to 101.375c on the dollar, according to Trace, the bond price reporting service of the NASD. The extra yield investors demand to hold Oracle debt over US treasuries widened from 69 basis points to 82 basis points.
"Obviously investor appetite is out there," Hyman said. "There could well be other situations."
The Cisco notes have not yet been priced. Hyman expected them "to be sold pretty rapidly in the next couple of days". Cisco spokesperson Heather Dickinson declined to comment on the issuance.
- Bloomberg