Monday, December 12, 2005

Intel to issue converitble debt - is tech old?

INTC announced that it plans to issue $1.4b in Junior Convertible debentures. INTC currently has very little debt on its books. Its long-term debt is close to $400m, paltry amount when you look at the accounts payable balance of over $2b. The $1.4b is also a paltry amount for a company with market cap of $160b. So why issue debt when a company like INTC generates wads of cash every quarter? For one thing company clearly believes that the cost of this debt will be below (well below) the cost of equity right now. Company suggested that it could use that $1.4b to buy back shares. INTC stock trades at equity yield of 5.5% and the company can most probably issue debt below that especially given that it’s a convert. Given that this debt will be cheaper than the implied equity yield on the stock, company can buy back shares and make it accretive for shareholders. Also, tech companies are clearly concerned about the dilution from option expensing and they are using this cheaper capital (debt) to offset some of the dilution.

But does this signal that tech (or INTC) is not a growth story any more? Most probably. CSCO also recently announced that the SFA acquisition will be partly paid for by debt. Seems like large tech bellwethers are becoming more involved in debt- clearly a sign of changing times. All this debt issuing does signal that the notion of no debt, no dividends, no cyclicality for tech is now old. Investors be aware, tech has grown up and grown ups trade in line with market not at a premium (for long).