intel corporation 1992

Intel Corp. 1992 – Financing and Dividend Policy

Group T2Anish Sengupta (13407)Deepanwita Nandi (13417) Navonil Rahut (13430) Neha Poddar (13431)Sourav Mohapatra (13453)

1.Financial Policy Making• Industry Trend ( Highly Innovative)

INDUSTRY PDLC (MIN.) = (2+1+2+2+2+2+2) yrs = 11 yrsINDUSTRY PDLC (MAX.) = (6+1.5+4+4+3+2.5+5) yrs = 26 yrs

• Intel’s Innovation and Success

– ability to adapt to perpetual paradigm shifting and its solid business relations with major buyers of integrated circuits.

– established reputation as a company that was consistently at the forefront of innovation. In the integrated circuit industry, a company’s innovation is fundamental to its success. “Moore’s Law”—the industry-wide benchmark for innovation—was created by Intel cofounder Gordon Moore. The law claims that the number of components on a chip doubles every two years.

– adherence to Moore’s law costly.

– Projection for 1992, $700 million in research and development costs and $1.2 billion in property plant and equipment costs.

– responsible for 16 of the 22 major breakthroughs in microelectronics between 1971 and 1981.

1.Financial Policy Making (Contd.)

• strong customer ties with major buyers of integrated circuits – IBM accounted for 8.6 % revenues and Purchased 12.5 mn shares

• R&D investment– made large investments in research and development and property,

plant, and equipment, which have thus contributed to their fixed costs. These fixed costs lead to a higher operating leverage which can make the good times better and the bad times worse

– i80286 and i80386DXTM– Sales increasing from 822 million in 1989 to 1084 million in 1990 to

1361 million in 1991.

• Advertising Budget– $100 mn on “intel inside”– entering ramp up phase (profitable phase) and high customer demand.



Increase in R&D and Advertising Budgets and Assets( Depreciation , Amortization)


Intel’s product list Product Portability

2.Financial Policy@Maturity

Estimated Future Cash Flows When the Firm will Mature

• Optimal Target Capital Structure– evaluate the levels of competitive threats, financial distress costs, indirect

costs, conflicts of interests, flexibility, management incentives, and market signals.

– the need for low debt and high equity once maturity is obtained.

• Recommended Capital Structure– altering capital structure to increase company ROE

– Take advantage of tax Benefits by raising level of Debt For tax shield

– Decrease equity Financing

– needs the flexibility of cash on hand to fund continued research and development, purchase of property, plant, and equipment, and to act as a reserve to buffer any losses, lawsuits, and other unforeseen expenses.



Incremental Cash Flow (ex.12)

According to Exhibit 12 in the case, the increase in cash for the years 1991 through 1995 would total an increase of $2.749 billion. In 1990 the ending balance of cash was $1.785 billion so by 1995 the cash balance would be $4.534. The pessimistic forecasts for the same years predict a total increase of $1.211 billion in cash, which would make a 1995 year end cash position of $2.996 billion. The average of these two extremes project an ending cashposition of $3.765 billion—or $1,980 billion above the 1990 cash level (see Exhibit 2).

Intel’s Cash Flow

• Necessary Steps to Be taken– distributing more cash in part to maintain Intel's low Long-Term Debt-

to-Assets Ratio of 10.43 percent (as compared to the industry average of 13.823 percent.) (Exhibit. 8)

– low ratio beneficial because of the inherent volatility in the integrated circuit industry low debt ratio can allow for flexibility during tumultuous economic times.

– In 1987, the LT-Debt-to-Assets Ratio was 12 to 13 percent but by 1990 this level had dropped to 6 percent. To increase profitability they need to increase their financial leverage by increasing their level of debt.

– cash levels are much too high.– cash levels of $2.4 billion in 1992, can finance its planned investment

expenditures out of cash for almost two and one-half years without any cash flow from operations.

– Cash is excessive. Even if balance lowered of cash by 50 percent, cash levels still 2 to 3 times the industry average.



Years Of Cash (Exhibit 8)

The Following Graph shows the number of years of current expenditures that can be funded by net cash balances .The industry average is 0.70 hence as the company matures it should decrease years cash to increase its financial leverage.

Intel also has very low levels of financial leverage. If Intel wants todecrease cash levels while increasing, financial leverage, the best option is to issue stockrepurchases. By decreasing its cash levels Intel is able to raise its LT Debt-to-Assets ratio.

3. Cash Disbursement Policy

A. through the issuance of dividends Benefits

• investors would be ecstatic to receive this periodic return on investment

Costs• tax-inefficient way to distribute funds. subjected to the corporate tax

rate

• these dividends are also considered taxable income which is taxed at the

investors tax rate—not the capital gains tax rate.

• investors entrust managers to profitably invest their capital, returning

dividends to the investors may indicate an inability to perform this task.

• issuing dividends may be the beginning of a cycle that cannot easily be stopped. Once Intel starts issuing dividends, it will be difficult to stop

without raising serious concerns about the profitability potential of a company.

Past Outcomes• In 1987, Intel repurchased and retired 13.35

million shares for $27 per share, which drastically increased price per share from around $28 to over $40 per share.

• Intel again made a repurchase in 1990 of 3.20 million shares; similar results followed and share prices rose from around $30 per share to over $50 per share

3. Cash Disbursement Policy (Contd.)B. stock repurchases

Benefitsfrom an investor’s perspective, stock repurchases are taxed at a lower rate. In 1991 and 1992, the tax rate on long-term capital gains tax for the highest tax bracket was 28%. Compared to a 31% tax rate for income (which dividends are taxed at) it is easy to see

why investors would be in favor of stock repurchases.

• Type Of Repurchase Decision– Condition

• Price of Intel's shares increase a repurchase becomes more and more expensive.

– Recommendation• type of repurchase that maximizes the amount of shares that they can

acquire with as little cost as possible.• Growth Firm hence as per Walter’s and Gordon's model Dividend not to be

paid

– Options• Open-market repurchase will cause delays and allow other investors to

push up the price before Intel goes in and repurchases.• announcing a flat fixed-price tender offer will have to be competitive to

attract the volume that they desire.

– Issues• Best price = Lowest Price @ volume required hence will leave majority

stockholders disappointed with value of equity• decision not necessarily be in the best interest of the majority of the

shareholders.

3. Cash Disbursement Policy (Contd.)

• Alternative Scheme

– Dutch Auction

• Intel can choose how many shares it wishes to buy back and specify a maximum price at which they are willing to do so.

• Shareholders then place bids at which they are willing to have their shares

repurchased.

• Those who want to ensure that their shares are repurchased will bid at a lower price.

– Advantages

• that Intel can purchase back their shares at a competitive price based on the demand for their shares.

• very quick process and gives agency to Intel's shareholders to sell their shares at the price of their choosing

– Estimated Buy Back• Available Funds(cash) = $ 2.7 bn , Research requirements = $700 mn ,

New plant and equipment Requirements = $1.2 bn , Net available Funds = $800 mn, Price of Share = $42.50, No. of share repurchase @ $42.50 = 18,823,529 shares


• Unconventional Package– Put warrant

• Sell option of 10% holding after 2 yrs @$50 back to Intel• Sell warrant @60¢ @ open market

– Effect ( Speculative)

• Rise in stock prices above $50 after 2 years hence none willing to sell Debt gone/cancelled.

• Fall in Stock Prices below $50 after 2 years hence buy back exercised thus Debt remains unchanged.

– Convertible Debenture– Convert Option after yr 2 @ $75 /share for 10 yrs Conv. Sub. Debentures

with 5% coupon

– Effect ( Speculative)• No change in Debt If share price not above $75 is difficult hence no one will opt for

the option hence debt will remain same • Change in shareholders wealth if Share price above $75 hence converted to shares

thus increase in no. of shares by 13.3 mn hence decrease in share price


intel corporation 1992

Economy & Finance