Microsoft going private? PIMCO's Ray Kennedy predicting a $50 Billion dollar LBO in 2007.

In an article today on CNN.com, PIMCO's Ray Kennedy was quoted as having said:

"It's just going to get bigger and bigger," Kennedy said. "We will test a mega-deal. You have to accept a $50 billion deal likely will occur."

If I understand his meaning correctly, he's saying that at some point in 2007, there will be a megadeal leveraged buyout that will result in a $50 Billion dollar bond offering.

The article gives this example:

"Freescale Semiconductor (Charts) sold $5.95 billion of debt last month, the biggest for a buyout since 1989, to help finance its $17.6 billion takeover by a Blackstone Group-led consortium."

So roughly 34% was financed through the issuance of debt. Another example from the article is the issuance of $6.1 Billion in debt in the leveraged buyout of RJR Nabisco in 1989, which from other sources appears to have been a $25 Billion dollar deal = 24.4% debt funded.

There have been rumors floating around about stagnation at Microsoft and poor management. A few have even mentioned the possibility of a private equity buyout, including this article from August 18th in Financial Times titled "Private equity folk could do wonders with Microsoft" Daniel Pimrack of Thompson Financial argued that this was a virtual impossibility at the time.

Say this mega deal is funded 35% through debt. $50 B / 0.35 = 142.85 Billion dollar deal. Playing with Yahoo's Stock Screener, you can see that there aren't too many companies with that kind of market cap. By my count, there are currently 25 - and IBM is the smallest. Obviously a deal of this magnitude will require a huge consortium of investors or one REALLY big company that has enormous cash flows to support that kind of debt.

A buyout of Microsoft makes a lot of sense. Microsoft is LOADED with fat, but not in the unionized, contract laden way that the auto makers are. Instead, it's mostly in the form of highly educated, very employable workers which can be easily cut down. I believe a good manager could change the strategy from "Growth" to "Cash Cow" in less than a year. Elminate all the products that are unprofitable, cut down the workforce, focus on Microsofts core products, and wham: everlasting cash machine. Well, at least a five year cash machine. Long enough that private equity buyers could generate enormous profits.

If anyone knows about this potential megabuyout, it's Ray Kennedy. Pimco is no joke:

"PIMCO, one of the largest specialty fixed income managers in the world, with more than $641 billion in assets under management and more than 800 employees in offices in Newport Beach, New York, Singapore, Tokyo, London, Sydney, Munich, Toronto and Hong Kong."

I just wish I knew which firm it's going to be. Microsoft sounds like a possibility, but I've been wrong many times.