Case study spread sheet solution - Intel Corporation 1992

Intel Corp., the world's dominant designer and manufacturer of microprocessors (the "brains" of the personal computer), has accumulated a large amount of cash (net of debt). Furthermore, it expects to continue to accumulate cash at an unprecedented rate. Has the company grown up to the extent that it can begin disbursing cash to its shareholders? What kind of disbursement policy should it choose? Intel will continue to face competition from imitators of its processors in the future, yet it is not clear whether its cash holdings can or will be a competitive weapon in this competitive battle. The case focuses on financial policy issues and on how they then interact with a very unusual and dynamic form of product-market competition and innovation. Can be used as a one- or two-day exploration of the following issues: complementarity externalities and costs of finance, appropriability of returns on investments, the role of finance in high-tech and rapidly innovating sectors, the strategic uses of cash, analysis of capital structure and cash disbursement policies, the use of financial policy as a competitive weapon, and timing in the sale and purchase of equity-linked instruments.

1. Intel Corporation 1992 –A Prelude
By Dr Uday K Jagannathan and Dr N Suresh

2. Observations
1.Semi conductor is Capital Intensive business
2.Characterized by Product Life Cycle
3.CAPEX and NI have grown to 949 and 819
4.Cash has accumulated to 2,777
5.The Cash plus LTI – LTD to Asset ratio has increased to 0.38, from 0.22 in 1987
6.The Decision is on what to do with excess cash?

3. 41
81
50 57 51
97
275
262
500
776
25
71
68
62
46
23
50
61
65
91
60
117
116
174
123
0
200
400
600
800
1000
1200
1987 1988 1989 1990 1991
Stacked Column - Profit in Million $
Memory MicroprocessorsMicrocontrollersPeripheralsSystems
246
594
557
858
1087
0
200
400
600
800
1000
1200
1987 1988 1989 1990 1991
Growth by Category over time
Memory Microprocessors Microcontrollers
Peripherals Systems Total
Observations
1.Microprocessors are the largest part of the Intel business
2.They are also the most rapidly growing part of the business
3.The important products for Intel are the 486 and 386
4.They are also the most capital intensive parts of the business
5.From Ex. 7 the 8088 and 8086 are reducing in shipments while 386 and 486 are ramping up

4. -48
19
46
-54
-59
138
132
159
304
142
235
287
279
115
128
-100
-50
0
50
100
150
200
250
300
350
1987 1988 1989 1990 1991
NI, CAPEX and Cash for AMD
NICAPEX Cash
Observations
1.AMD is losing money but they keep the CAPEX low as an imitator to Intel Ex. 8
2.They hold cash but their cash to capex ratio is much smaller than that of Intel
3.The magnitude of AMD Capex is much smaller than that of Intel
4.The market has rewarded AMD strategy of imitation and not so much the innovation of Intel Ex 11
5.Therefore, Intel is facing a competitive threat from the imitators see pg. 5 in the case
6.Other competitors incl. Fujitsu-Sun Micro and Motorola-Apple, Japanese RISC competition
1.0
1.5
1.7
2.2
2.5
2.8
2.5
2.3
2.5
1.9
2.6
2.9
3.5
1.0
1.4
1.6
1.5
1.41.3
1.1
1.1
1.21.3
1.11.11.1
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Stock Performance of Various firms
INTEL AMD CHIPS & TECHNOLOGY

5. Intel Financial History
•Went public in 1971
•Adjustable rate bond with average interest rate of 8% in 1983 of 110 mn $
•Convertible debenture – useful when interest rates drop, they are called or converted to equity, Intel did
one in 1980 for 150 mn $ and called it in 1983
•Warrants can be like Call Options, which yield “premium-like” cash flows at entry and additional cash
flows when warrants are exercised, but they lead to dilution of EPS when exercised
•Less prevalent in the US, but the put warrants offer an alternative to buy-backs
•IBM purchased stock at 20 per share for 250 mn $ and sold it back to Intel at 27 per share in 1987
•Intel issued 9 million warrants for $63.3 million in 1987 and were exercised for 270 million $ in 1988
•Various ESOPs – resulting in 42 million $ and 39.3 million $
•To offset dilution, Intel sold warrants for 14 million $ to sell Intel stock back at 40$ per share

7. The various choices available to Intel
•The level of cash available is 2.5 years of Capex too much according to the
Case!
•The choices available –
(i)Fixed or Dutch Auction
(ii)Dividend of 84 cents per share
(iii)Put Warrant with 10 year 1 billion $ convertible debenture and 5 percent
coupon and these bonds convert into 13.3 million shares at 75 $ per share in
2 years (1994)

8. Scenario 1 : Buyback 15 percent of shares at 50 dollars per share
We should
buyback 15
percent of the
shares and NOT
issue any more
shares (row 13
should be zeros)
and also observe
the EPS increases.
Sensitivity analysis
shows EPS only
depends on
Buyback number
of shares not on
the Premium

9. Scenario 2 : Dividend of 84 cents per share, constant 208.99 shares for next 5 years
No impact on EPS
and the Cash level
is still high
So this may not be
optimal
Note we are NOT
issuing any more
shares as the cash
level is high enough
so row 13 is ZEROS

10. Scenario 3A : Share below 50 dollars, Intel buys back in 1993
The warrants are
exercised and the
Cash levels more
or less balance
EPS is at 7.12 at the
end of 1995

11. Scenario 3B : Share between 50 and 75
The warrants are
NOT exercised, and
the Cash levels are
high
EPS is at original
level

12. Scenario 3C : Share more than 75
The warrants are
NOT exercised, and
the Cash levels are
high
EPS is at lower
level than original