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Intel Corporation, 1992
Transcript of Intel Corporation, 1992
By: Kevin Skogström Lundgren
Robert Björn Toivo Kinnune
• Current Capital Structure & Cash Management
Intel as a First Mover
By 1992, Intel was the second largest manufacturer of integrated circuits.
The strategy of being a first mover:
little problems with backwards-compatibility
enjoy premium prices
Faced stiff competition from several electronics companies, including imitators.
High operational leverage: Intel had to regularly make huge investments in not only R&D but then also production facilities (fabs), leading to high operational leverage.
• Low debt, Huge cash
Good to have a lot cash in hand
Precautionary motive”: When operating under such high risks Intel’s large cash reserve is a big advantage according to pecking order theory.
“Long purse”: more financial slack, squeeze out smaller companies entering the market by making strategic commitments.
Bargaining power: a strong position when negotiating with creditors, suppliers and also labor.
Low agency cost of debt for intel
• Yes, good to have cash, but do they really need that much cash?
Maybe unnecessarily large? ( with 2,4 billion, they could fund its planned investment expenditures out of cash for almost two and one-half years)
Little return on cash, tax disadvantage. opportunity cost
Jensen’s free cash flow hypothesis: managerial discretion and agency cost. empire building, overinvestments instead of maximizing shareholders
• So: They should probably issuing more debt and distribute the excess money.
• The unconventional package
o Put warrants: shareholder can sell 10% holdings @ $50/sh after two years. Can also sell on market for 60 cent/sh.
o 10 years convertible subordinated debentures with 5% coupon can be converted at the end of 2 years at $75/sh.
o put option+ call option
o What it the stock price at the end of year 2?
If stock prices rises: convert their bonds, meaning that Intel has issued another 1 billion dollar of shares and debt is gone
If stock prices falls(below 50): exercise the put warrant, repurchase 1 billion dollars of shares, the debt unchanged.
o Strange package, don’t solve any financial dilemma
Negative Effects of Cash dividends and Stock repurchases
Reduce the amount of internal equity available for Intel’s future investments.
Increase the probability that Intel will have to sell new equity if new investment should be funded with equity.
Add the leverage.
Frequency and Cash out Flow
are expected to be paid out regularly for indefinite amount of time and their cash out flow is permanent.
of shares send less of a signal of weakness to the market and the cash out flow is temporary since it is expected to be sporadic whereas dividends send a stronger signal.
Regular Dividends versus Special Dividends
have signaling problem.
have no signaling problem but instead Intel would probably need to pay a dividend much larger than what they would have to if they choose to pay dividends regularly.
Repurchase Add the Demand for Intel’s Share
Raise the market price of the stocks.
Enhance its liquidity in secondary market.
Against Hostile Takeover
give Intel the ability to dilute substantially a potential acquirer’s holdings create large disincentive to attempt a hostile takeover.
Selling shares has a more favorable tax consequence than collecting dividends.
Management will buy back stocks when they feel that the stock is undervalued, buying back stock sends a credible signal to the market that the stock is undervalued. Hence a consequence of this is that the price of a share will increase.
Managerial Incentives and Management Compensation
will make the free cash flow to be greater and management being self-serving will increase.
has no free cash flow problem.
Preference for Repurchase
was trying to conduct stock repurchases than dividends
also show that dividend component of the returns on stocks has steadily fallen while stock purchases have increased.
Altering capital structure, rise more debt.
Repurchase while still keep some cash in hand.