wow
"The company has roughly $5.6 billion in outstanding debt"
wow!
That got me to google. As it turns out, only 18 out of the 500 s&p 500 companies don't have ant dept. That is crazy to think about.
If you can make more money running your business than lending money, then you can also make more money than it would cost to borrow money. If you are making 10% on your $100 and someone offers you another $100 for 5%, then it's a pretty good deal if you can expand your business. Just to make it clear, 10% on $100 is $10 and 5% on $100 is $5 dollars. So by borrowing, you expand your business and make $15 instead of $10 -- increasing your profits by 50%.
Obviously, I chose easy numbers to make the math obvious, but generally it works. The thing you need to ask yourself before you borrow money is, "What are the chances that I can make that I can expand my business with that money" and "What are the risks". But generally speaking, healthy companies can increase profits if people keep offering them more money to work with. There are a few exceptions that have so much cash that they don't know what to do with it. Believe it or not, that is considered to be a big problem.
Even companies with large cash reserves will take out loans when the interest rates are less than the internal rate of return of spending that loan. Most people take out loans for personal things, not increasing their own personal rate of return.
No. The idea of the company is to pay out the $100 to shareholders. You take on debt if that makes more financial sense to the shareholders.
A prime example is AAPL and their dividends. They could repatriate $1 billion from overseas accounts and pay 10% ( or $100 on taxes ) and then pay $900 million in dividends to the shareholders. Or they could keep their $1 billion overseas, borrow $1 billion at 1% interest rate and pay $1 billion to shareholders.
Debt makes sense for corporations because you are able to shift profits to the shareholders and risk/liabilities to the company. Ultimately, that's why companies exist. To shield shareholders from liability and to serve as a vehicle to transfer profits/wealth to the shareholders.
I'm BigCo and am valued at two billion dollars. My profits are $100m a year. ($100m x 20 = $2bn)
There is a company I could buy that is complementary to my business. It's generating $20m a year in profit. The price is $140m.
Spending $140m (6 times earnings) will approx. increase your market cap by $400m (20 times earnings) -- making every shareholder richer. So what do you do? You go and raise the debt and make the acquisition if you think you can run the business.
Debt in itself isn't bad. It's a lever that makes good decisions great, or bad decisions horrible. It needs to be used conservatively. Most large companies should use both longer term and shorter term debt in their businesses.
Leverage works both ways, so to my old fashioned way of thinking there's a lot to be said for not getting over extended. Leaving some profit on the table beats shutting down.
Either way the board members will probably okay, and most of the shareholders probably didn't have their live savings all in that particular company.
I guess this is why investing is a risk vs reward trade-off. If you're of the opinion that leaving some profit on the table beats shutting down, then you probably want to invest heavily in blue chip stocks. Others might have a different risk preference.
Being all equity doesn't prevent you from insolvency. You still have money that you owe, like salaries.
Notice that the author in your link states he's long on AAPL and MSFT, both of which have somewhere around $90 billion in debt last I heard.