From: Mr. Dar Maanavi, Managing Director, Equity-Linked Capital Markets Group of Merrill Lynch
Re: $5 Billon Convertible Debt Offering Proposal
We are pleased to present to you the salient features of our proposed $5B convertible debt offering for your careful review and approval. We deemed it appropriate to walk you through the analytical process in coming up with the right mix of conversion premium and coupon rate. We initially consider a conversion premium of 25% and determine its corresponding coupon rate. We then explore the appropriateness of such a premium and explore other conversion premium-coupon rate combinations and determine which combination would be optimal for both the company and potential investors.
Before we delve into the details of the calculations, we would like address any remaining doubts on the appropriateness of a convertible debt offering for the company, vis-à-vis a straight bond or equity issuance.
Is issuing a convertible appropriate for the company?
We discuss first Mogen’s risk profile and growth opportunities. The company has good growth opportunities because of the following reasons: 1) Its high investment in R & D to diversify its product line; 2) Its acquisition of another company (Genix, Inc.) is seen to create synergy with existing capabilities of Mogen to support the revenue and income growth; 3) It has consistently registered 29% annual increase in sales for the last 5 years; and 4) Its EPS has shown improvement from $1.69 in 2003 to $2.97 in 2005, or a 70% increase in EPS over the last 2 years.
The company has clearly identified that its planned use of funds is mainly to sustain growth. Add to the fact that it is rated A+ because of its low leverage position, we understand why the management strongly feels that the stock price is grossly undervalued and issuing equity might result to further dilution of earnings.
However, the company appears to...