Harvard Business School 9-292-106
Rev. March 24, 1993
Intel Corporation, 1992
While returning cash was a worthwhile goal, Moore recognized that cash availability was an essential component of the firm’s overall strategy and that future cash needs were very uncertain. He knew that the company faced considerable competitive pressure over the next few years. Imitations of Intel’s proprietary microprocessor products had recently obtained substantial market share. Furthermore, the production and development of new Intel products required ever-larger up-front expenditures. In 1992 alone, Intel was expecting to spend over $700 million on research and development (R&D) and approximately $1.2 billion on new plant and equipment. The rapid rate of innovation in Intel’s business meant that it would be extremely costly—perhaps even fatal—to delay or scrimp on these expenditures. Moore was also concerned with the stock market’s response to recent competitive pressures. Intel’s stock had over the last few weeks been trading at a price of $42.50 per share—a price-earnings (P/E) ratio of under 11, far below the P/E of about 20 for the Standard and Poors’ 500. Some outside analysts seemed to be pessimistic about Intel’s ability to keep its profits high. Notwithstanding these concerns, Moore asked Intel’s Chief Financial Officer, Harold Hughes, and Treasurer, Arvind Sodhani, to determine whether Intel’s current capital structure was appropriate. Moore also wanted to know what alternatives might be available for disbursing cash to shareholders.
1The largest firm in all of U.S. history never to have paid a dividend was Digital Equipment Corporation, which
in 1987 had a market capitalization as high as $26.6 billion. However, by December 1991, DEC's market capitalization had fallen below Intel's, to $6.7 billion.
Professor Kenneth A. Froot prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 1992 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.
In late December 1991, Intel Corporation’s cofounder and Chairman of the Board, Gordon Moore, was rethinking the company’s capital-structure and cash-disbursement policies. The company had just completed an extremely successful five-year period during which annual revenues had grown almost fourfold. Now the firm found itself with cash balances (net of long-term debt) of $2.4 billion—well over one-third of total assets of $6.3 billion. With a market capitalization of almost $9 billion, Intel had become one of the largest firms in the United States never to have paid a dividend.1 Moore wondered whether the firm he founded in 1968 had grown sufficiently mature to begin returning some of its cash to investors, perhaps by beginning to pay dividends or repurchasing shares of stock.
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Intel Corporation, 1992
Intel was founded in 1968 by Moore and the recently deceased Robert Noyce (coinventor of the integrated circuit and vice chairman of Intel until 1988). The company quickly established a reputation as a leading innovator in the design, development, and manufacture of semiconductors. In 1969, Intel produced the world’s first static random access memory (SRAM). This was followed by the 1024-bit dynamic random access memory (DRAM) in 1970. Intel DRAMs, which rapidly grew in...