Monday, July 20, 2009 0 comments ++[ CLICK TO COMMENT ]++

Intel planning to issue debt to buy back shares - good or bad?

Bloomberg reports that Intel will issue $1.5 billion in debt in order to re-purchase shares:

Intel Corp., the world’s largest chipmaker, plans to sell $1.5 billion in debt, using the money to buy back shares.

The bonds, which would be convertible into shares, will mature in 2039, Santa Clara, California-based based Intel said today in a statement. Most of the funds will pay for stock repurchases, with a portion going toward general corporate purposes, the company said.

Intel is raising money now to take advantage of favorable market conditions, as it did when it sold debt in 2005, said Tom Beermann, a company spokesman. Intel had more than $10 billion in cash and short-term investments as of last month. The company has $1.6 billion of convertible bonds maturing in 2035.

Is this a good tactic or not?

I don't think this is a bad tactic for Intel. I don't follow Intel so assuming the stock didn't have a split or pay out a stock dividend, the price looks low compared to the past.

They did the same thing in 2005 and it had very little impact, as one would expect. Intel's market cap is $106 billion so buying back $1.5 billion of shares is roughly 1%. It would be difficult to see such a small price move on that chart.

Intel also has more than $10 billion in net cash so the debt doesn't really weaken the capital structure of the firm.

The only thing I don't like about the deal is that they are issuing convertible bonds. Why not just straight bonds? Wouldn't the convertibles simply result in more dilution later on (although possibly at higher prices, depending on terms)?

It remains to be seen if this ends up being a good move or not. We had many companies issuing debt and buying back shares a few years ago but that was clearly a poor move. There were also a whole hoard of them, mainly in the commodity industries, who issued a ton of debt, not to buy back their own shares, but to buy shares of other companies. I'm taking of takeovers, of course. That also ended up with as a disaster and I'm surprised that executives who destroyed significant shareholder wealth are still running those businesses (who says executive greediness is limited to banks? ;) ). Righ now, though, it is a different matter. Overall, the amount involved here, in the Intel case, is trivial. I'm curious to see if some companies issue tens of billions in debt (say 5% to 10% of their market cap) to buy back shares.


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