Intel Capital Structure
Question 5: Evaluate the Put-Warrant/Convertible Bond proposal. Does it solve Intel’s capital structure dilemma? What arguments might be made in favor of it?
Intel’s capital structure dilemma was that it was holding too much cash on hand. Eventually, there were three available strategies or alternatives that Intel could undertake in terms of cash disbursement policies. First, it could continue or expand its market-repurchase program. Secondly, Intel could declare dividends to its shareholders on existing stocks. The last strategy is to put together a package of two unique securities: 1) A distribution of a two-year put warrant to its existing shareholders. 2) A distribution of 10-year convertible subordinated debentures to new investors. This answer will attempt to assess whether this proposal solves Intel’s capital structure dilemma, and the factors which support the proposal.
Intel has actually executed the issuance of put-warrants (November 1991) and issuance of convertible subordinated debentures (August 1980) in the past.
By distributing the warrants to its shareholders, Intel intends to keep its shareholders satisfied, and also provides a form of assurance that the company is financially stable and heading in the right direction. In the event that Intel’s stock price at the warrants’ expiry date is more than $50, Intel profits clearly, as none of its shareholders would exercise the put warrants. On the other hand, if the stock price is lower than the strike price of $50, then Intel would be obliged to buy back 20.9 million of its shares at an estimated cost of $1 billion. Although this might seem like Intel suffering from a loss, the objective of reducing its cash holdings, and at the same time decreasing its equity, is met. For investors, this helps to act as an insurance against falling stock prices. Another benefit is that the investors can sell off their warrants for 60 cents each.
History has shown that corporations, such as Microsoft,
Intel’s capital structure dilemma was that it was holding too much cash on hand. Eventually, there were three available strategies or alternatives that Intel could undertake in terms of cash disbursement policies. First, it could continue or expand its market-repurchase program. Secondly, Intel could declare dividends to its shareholders on existing stocks. The last strategy is to put together a package of two unique securities: 1) A distribution of a two-year put warrant to its existing shareholders. 2) A distribution of 10-year convertible subordinated debentures to new investors. This answer will attempt to assess whether this proposal solves Intel’s capital structure dilemma, and the factors which support the proposal.
Intel has actually executed the issuance of put-warrants (November 1991) and issuance of convertible subordinated debentures (August 1980) in the past.
By distributing the warrants to its shareholders, Intel intends to keep its shareholders satisfied, and also provides a form of assurance that the company is financially stable and heading in the right direction. In the event that Intel’s stock price at the warrants’ expiry date is more than $50, Intel profits clearly, as none of its shareholders would exercise the put warrants. On the other hand, if the stock price is lower than the strike price of $50, then Intel would be obliged to buy back 20.9 million of its shares at an estimated cost of $1 billion. Although this might seem like Intel suffering from a loss, the objective of reducing its cash holdings, and at the same time decreasing its equity, is met. For investors, this helps to act as an insurance against falling stock prices. Another benefit is that the investors can sell off their warrants for 60 cents each.
History has shown that corporations, such as Microsoft,