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Intel Raises $6 Billion in Bond Sale to Buy Back Stock

36 points by Quekster 14y ago

paragraft 14y ago
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?
- deleted 14y ago
  [deleted]
- meltzerj 14y ago
  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.
- jpdoctor 14y ago
  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.
- pebb 14y ago
  Closing the company and returning money to shareholders (in the most extreme case + bankruptcy so taxpayer pick up the rest)
- gregw134 14y ago
  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.
- gromi60 14y ago
  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.
- marcamillion 14y ago
  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.
npguy 14y ago
Tax would also be a big reason. Effectively they might have a reduced tax scenario after this buy back
6ren 14y ago
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?
- CamperBob2 14y ago
  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.
  - jlgreco 14y ago
    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.
    - ibrahima 14y ago
      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.
  - 14y ago
deleted 14y ago
[deleted]
defactoserfdom 14y ago
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

36 points by Quekster 14y ago

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?

deleted 14y ago
[deleted]
meltzerj 14y ago
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.
jpdoctor 14y ago
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.
pebb 14y ago
Closing the company and returning money to shareholders (in the most extreme case + bankruptcy so taxpayer pick up the rest)
gregw134 14y ago
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.
gromi60 14y ago
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.
marcamillion 14y ago
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.

npguy 14y ago

Tax would also be a big reason. Effectively they might have a reduced tax scenario after this buy back

6ren 14y ago

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?

CamperBob2 14y ago
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.
- jlgreco 14y ago
  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.
  - ibrahima 14y ago
    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.
- 14y ago

deleted 14y ago

[deleted]

defactoserfdom 14y ago

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