Prepared for:
Taylor Nadauld
By:
Geoff Bays
Carl Dixon
Jordan Walton
Calvin Weight
1987
210
672
1988
538
989
1989
822
1174
1990
1084
1854
1991
1361
2501
percent.) This low ratio can prove beneficial because of the inherent volatility in the
integrated circuit industry as this low debt ratio can allow for flexibility during tumultuous
economic times. A problem arises from Intel's trend in progressively decreasing debt from
the books year-to-year. In 1987, the LT-Debt-to-Assets Ratio was 12 to 13 percent but by
1990 this level had dropped to 6 percent. Intel would be able to increase profitability if they
increased their financial leverage by increasing their level of debt.
Despite the volatility of the integrated circuit industry, it is clear that Intels cash levels are
much too high. With cash levels of $2.4 billion in 1992, Intel could finance its planned
investment expenditures out of cash for almost two and one-half years without using any
cash flow from operations. Intel has year's cash of 2.9 (year 1990) versus the industry
average of .49 (See Exhibit 3). Cash is useful to meet cash flow needs, but 2.9 years is
excessive. Even if Intel lowered the balance of cash by 50 percent, Intels cash levels would
still be 2 to 3 times the industry average.
As noted previously, Intel also has very low levels of financial leverage. If Intel wants to
decrease cash levels while increasing, financial leverage, the best option is to issue stock
repurchases. By decreasing its cash levels Intel is able to raise its LT Debt-to-Assets ratio.
(Since treasury stock is a contra equity account, repurchasing shares will also increase the
debt-to-equity levels for Intel.)
value of the equity. Consequently, this decision will not necessarily be in the best interest of
the majority of the shareholders.
Dutch Auction
A Dutch auction would make the most sense to Intel. With a 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. The Dutch auction insures that Intel can purchase back their shares at a
competitive price based on the demand for their shares. The Dutch auction is more
advantageous than both the open-market repurchase and the fixed-price tender offer
options of repurchasing shares because it is a very quick process and gives agency to Intel's
shareholders to sell their shares at the price of their choosing.