Intel Raises $6 Billion in Bond Sale to Buy Back Stock(bloomberg.com)
bloomberg.com
Intel Raises $6 Billion in Bond Sale to Buy Back Stock
http://www.bloomberg.com/news/2012-12-04/intel-plans-three-part-bond-offering-to-repurchase-common-stock.html
5 comments
Tax would also be a big reason. Effectively they might have a reduced tax scenario after this buy back
Could someone explain to a market novice what the rationale would be for this? I thought buybacks were a way of delivering value back to existing shareholders, but why take on debt to do that?
Current share price is about $20. So for the $6 billion you retire 300 million shares. There are about 5 billion total shares outstanding so you retire 6% of your shares.
Effective interest rate on the $6 billion in bonds is approx. 2.4%. The stocks dividend is 0.90 cents per share which equals a dividend yield of 4.6% .
Think of it as a small company where you own 94% of the company and a partner who has a 6% share of your company. You can take out a loan for $100k and pay 2.4% ($2,400 per year) to the bank. or keep paying him a dividend (his share of earnings) at $4,600 per year. Kind of a no-brainer in terms of immediate cash flow. Plus after 10 years when you've paid off the loan you now own 100% of your company.
When you think of it that way it's really a slam dunk for Intel.
For Intel, their cash flow for 2011 was approx. $20 billion so they can obviously afford to pay back the loan.
Effective interest rate on the $6 billion in bonds is approx. 2.4%. The stocks dividend is 0.90 cents per share which equals a dividend yield of 4.6% .
Think of it as a small company where you own 94% of the company and a partner who has a 6% share of your company. You can take out a loan for $100k and pay 2.4% ($2,400 per year) to the bank. or keep paying him a dividend (his share of earnings) at $4,600 per year. Kind of a no-brainer in terms of immediate cash flow. Plus after 10 years when you've paid off the loan you now own 100% of your company.
When you think of it that way it's really a slam dunk for Intel.
For Intel, their cash flow for 2011 was approx. $20 billion so they can obviously afford to pay back the loan.
For Intel, debt is currently a less expensive way of capitalizing the company than equity. At 1-4% interest, Intel can borrow money through debt at a very cheap rate, but it is expensive for them to raise money through equity sales since their stock price is relatively low. Swapping debt for equity allows them to borrow money from the cheaper source without having to deplete their cash reserves.
Taxes. Intel can write off interest payments, whereas they can't write off dividends - if I am not mistaken.
Plus, there are other tax advantages to taking on debt.
Plus, there are other tax advantages to taking on debt.
Take it from the point of view of Earnings Per Share (EPS).
The company thinks that reducing the number of shares can be accomplished at a price that is low, and that the interest on the loan to reduce the shares won't lower EPS. The shareholders should be (nominally) happy, because they are getting an earning income stream that is going to be higher in the future.
Now as an aside: Corporations famously mistime buying back shares, and management is usually trying to feather their nest rather than deliver long term value, so they typically make poor decisions on buybacks.
The company thinks that reducing the number of shares can be accomplished at a price that is low, and that the interest on the loan to reduce the shares won't lower EPS. The shareholders should be (nominally) happy, because they are getting an earning income stream that is going to be higher in the future.
Now as an aside: Corporations famously mistime buying back shares, and management is usually trying to feather their nest rather than deliver long term value, so they typically make poor decisions on buybacks.
Swapping debt for equity allows Intel to benefit from the interest tax shields from debt, which raises the enterprise value of the firm, assuming that default risk does not disproportionately rise.
[deleted]
Closing the company and returning money to shareholders (in the most extreme case + bankruptcy so taxpayer pick up the rest)
Buybacks usually mean the company thinks their stock is underpriced. However, x86 is currently being disrupted by ARM, and the prognosis does not look good. For example, they've finally got their power consumption to around ARM levels, but the entire mobile industry is based on ARM - ARM is now the incumbent.
Is this Intel hubris, or do they know something we don't?
Is this Intel hubris, or do they know something we don't?
Buybacks usually mean the company thinks their stock is underpriced.
Everyone gets this wrong.
I blame crappy financial journalism for the widespread belief that stock buybacks are supposed to increase the price of the company.
According to financial theory, a stock buyback destroys cash on hand and outstanding stock at the same time. This reduces the value of a company by EXACTLY AS MUCH as it reduces the outstanding stock. Therefore the stock price should remain unchanged to first order effects.
Therefore a stock buyback in theory is just a way of returning money to investors with different tax consequences than a dividend.
So all that you should read from "stock buyback" is, "excess cash is available to distribute to the owners".
In this case excess cash is being raised by taking on debt. But the Modigliani–Miller theorem also says that the structure of financing of a company has no correlation with its performance, so that shift should not matter much.
Everyone gets this wrong.
I blame crappy financial journalism for the widespread belief that stock buybacks are supposed to increase the price of the company.
According to financial theory, a stock buyback destroys cash on hand and outstanding stock at the same time. This reduces the value of a company by EXACTLY AS MUCH as it reduces the outstanding stock. Therefore the stock price should remain unchanged to first order effects.
Therefore a stock buyback in theory is just a way of returning money to investors with different tax consequences than a dividend.
So all that you should read from "stock buyback" is, "excess cash is available to distribute to the owners".
In this case excess cash is being raised by taking on debt. But the Modigliani–Miller theorem also says that the structure of financing of a company has no correlation with its performance, so that shift should not matter much.
Short: You are right that a stock buyback is a technique, like dividends, to return capital to existing investors. However, stock buybacks are also a technique used by firms that believe their stock is underpriced, and is likely what is happening here.
Long: To say that a firm's equity is "underpriced" is to say that the firm believes it is expensive (risk-adjusted), compared to it's debt.
This implies a two things:
* Asymmetric information - that the firm knows something the market doesn't.
* That the firm is at a sub-optimal weighted average cost of capital, and can reduce the cost of its capital by restructuring.
As found by MR Leary at Duke and cited by 600 others[1], firms resolve this situation by rebalancing their capital structure. One way to do this is to issue debt at a low interest rate to buy back the firm's "expensive" stock.
The Modigliani–Miller theorem that you reference does indeed argue that capital structures don't matter and that rebalancing shouldn't need to occur. However the theory doesn't apply in practice since it assumes the absence of asymmetric information, taxes, and the presence of an efficient market [2].
1. http://scholar.google.com/scholar?cluster=179408952930709446...
2. http://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theor...
Long: To say that a firm's equity is "underpriced" is to say that the firm believes it is expensive (risk-adjusted), compared to it's debt.
This implies a two things:
* Asymmetric information - that the firm knows something the market doesn't.
* That the firm is at a sub-optimal weighted average cost of capital, and can reduce the cost of its capital by restructuring.
As found by MR Leary at Duke and cited by 600 others[1], firms resolve this situation by rebalancing their capital structure. One way to do this is to issue debt at a low interest rate to buy back the firm's "expensive" stock.
The Modigliani–Miller theorem that you reference does indeed argue that capital structures don't matter and that rebalancing shouldn't need to occur. However the theory doesn't apply in practice since it assumes the absence of asymmetric information, taxes, and the presence of an efficient market [2].
1. http://scholar.google.com/scholar?cluster=179408952930709446...
2. http://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theor...
"... the [MM] theorem is still taught and studied because it tells something very important. That is, capital structure matters precisely because one or more of these assumptions is violated. It tells where to look for determinants of optimal capital structure and how those factors might affect optimal capital structure"
"Miller and Modigliani (1963) and Miller (1977) addressed the issue more specifically, showing that under some conditions, the optimal capital structure can be complete debt finance due to the preferential treatment of debt relative to equity in a tax code. For example, in the U.S. interest payments on debt are excluded from corporate taxes. As a consequence, substituting debt for equity generates a surplus by reducing firm tax payments to the government."
http://www.econ.uiuc.edu/~avillami/course-files/PalgraveRev_...
"Miller and Modigliani (1963) and Miller (1977) addressed the issue more specifically, showing that under some conditions, the optimal capital structure can be complete debt finance due to the preferential treatment of debt relative to equity in a tax code. For example, in the U.S. interest payments on debt are excluded from corporate taxes. As a consequence, substituting debt for equity generates a surplus by reducing firm tax payments to the government."
http://www.econ.uiuc.edu/~avillami/course-files/PalgraveRev_...
It's honestly not clear that the underlying CPU architecture really matters anymore. Smaller customers might care about the technical hassles involved with switching to a new architecture, but smaller customers don't count. The larger customers care much more about per-unit cost savings, and not at all about NRE costs.
In any case there isn't a lot of ARM assembly out there these days, and everything else can retarget x86 with little more than a recompile.
In any case there isn't a lot of ARM assembly out there these days, and everything else can retarget x86 with little more than a recompile.
I don't think I agree with 6ren's analysis, but I think that the fact that it is "not clear that the underlying CPU architecture really matters anymore" means that the game has shifted for Intel.
It seems to me that Intel has traditionally benefited from the fact that CPU architecture has mattered (in x86's favor). The mere fact that x86 is no longer the only sensible choice, while obviously not a doom prophecy for Intel, isn't really an argument for Intel's continued relevance.
It seems to me that Intel has traditionally benefited from the fact that CPU architecture has mattered (in x86's favor). The mere fact that x86 is no longer the only sensible choice, while obviously not a doom prophecy for Intel, isn't really an argument for Intel's continued relevance.
Well, you're right to some extent, but it also means that if Intel were to use their R&D might to engineer an x86 mobile chip that (for instance) is twice as fast as an ARM chip with the same power consumption, it would be in the next top iPhone/Android/WinMo handset without much difficulty. I honestly would not be too surprised if something along those lines happened. The RAZR M-i or actually seems to be competitive with the ARM version of the RAZR M in terms of battery life and performance, and they can only improve from there.
In practice Intel had to develop an ARM emulator for x86 to even stand a chance in the Android market, because so many apps use native ARM code and they have no reason to so much as recompile.
I suppose thy could buy into an exclusive deal with a minority market share platform such as BB10 or WinMo8 instead, because then the installed base wouldn't matter. That would only work if they could:
(a) offer a competitive advantage over ARM.
(b) make it financially appealing to the platform vendor. (c) Pick a platform that has a hope in hell of getting market traction.
Their best bet there would be MS/Nokia, but it would be a case of seeing if tying three sinking ships together works better than two.
Perhaps they know something along these lines:
http://seekingalpha.com/article/1039321-intel-inside-the-app...
Can this have anything to do with the Fiscal Cliff?
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There seems to be a lot of confusion about why they would do this, the text books say it indicates that the company thinks its stock is undervalued and that the management have the best information on the company so they would know.
In this case I think it is a cost of capital vs interest rate decision.
tl:dr Interest rates are low