CORNING, INC.: ZERO COUPON CONVERTIBLE DEBENTURES
DUE NOVEMBER 8, 2015 (A)
On November 8, 2000, Corning announced that it would issue $2.7 billion in zero-coupon convertible debentures priced at $741.923 per $1,000 principal amount. The initial public offering (IPO) price yielded 2% per annum to maturity, compounded semiannually. A summary of terms is given in Exhibit 1. Concurrent with the offering, Corning also conducted a separate public offering of 30 million shares of its common stock at $71.25 per share.1 Neither offering was contingent upon completion of the other. The entire financing would raise around $4.8 billion.
Corning planned to use the proceeds of both offerings to fund its acquisition of Pirelli S.p.A.’s 90% interest in Optical Technologies USA, Pirelli’s optical-components and -devices business. The total acquisition consideration was approximately $3.6 billion in cash. The acquisition agreement had been announced on September 27, 2000, and pended regulatory approval. Observers agreed, however, that the acquisition was likely to be completed. The issue of the Corning zero-coupon convertibles came to the attention of Julianna Coopers, an investment analyst at the Paradigm Group of mutual funds. The Paradigm Group offered 36 different funds and managed more than $50 billion in assets. Coopers and her group handled Paradigm’s Convertible Securities Fund, which sought “high returns through a combination of current income and capital appreciation.”
Coopers had been tasked with assessing the new issue of Corning convertibles. That day, she needed to decide whether to recommend purchasing some of the bonds for the Convertible Securities Fund. Her task was to assess the risk of the bond issue, and judge the adequacy of the yield, offering price, and the conversion terms.
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Corning, Inc., competed in three broadly defined operating segments: Telecommunications, Advanced Materials, and Information Display. The Telecommunications division accounted for roughly 70% of company’s revenue. Exhibit 2 contains a breakdown of sales and net income by operating segment. Exhibit 3 provides a detailed breakdown of the products within each operating segment.
Corning was the world’s largest manufacturer of optical fiber and amplifiers, with a 50% share of the optical fiber market, twice that of its nearest competitor, Lucent. At the time of the offering, the fiber market was in a sold-out state, and Corning had presold the next 18 months of its entire fiber manufacturing capacity.2 Worldwide demand for fiber grew by 40% in 1999, and management expected the same robust growth rate for 2000. Going forward, industry analysts expected the annual growth rate for fiber to be between 20% and 25% through 2002, although there was some debate about a potential fiber glut.
Within the company’s Telecommunications division, its photonics business increased at a triple-digit annual rate. The photonics business manufactured products that enhanced the flexibility and performance of communications networks. Those products boosted, combined, separated, and connected optical signals transmitted over fiber optic networks. Because of strong demand, Corning expanded capacity for photonics six-fold over the...
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