
Intel Raises $6 Billion in Bond Sale to Buy Back Stock - Quekster
http://www.bloomberg.com/news/2012-12-04/intel-plans-three-part-bond-offering-to-repurchase-common-stock.html
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npguy
Tax would also be a big reason. Effectively they might have a reduced tax
scenario after this buy back

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paragraft
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?

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gromi60
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.

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6ren
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?

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btilly
_Buybacks usually mean the company thinks their stock is underpriced._

Everyone gets this wrong.

I blame crappy financial journalism for the widespread belief that stock
buybacks are supposed to increase the price of the company.

According to financial theory, a stock buyback destroys cash on hand and
outstanding stock at the same time. This reduces the value of a company by
EXACTLY AS MUCH as it reduces the outstanding stock. Therefore the stock price
should remain unchanged to first order effects.

Therefore a stock buyback in theory is just a way of returning money to
investors with different tax consequences than a dividend.

So all that you should read from "stock buyback" is, "excess cash is available
to distribute to the owners".

In this case excess cash is being raised by taking on debt. But the
Modigliani–Miller theorem also says that the structure of financing of a
company has no correlation with its performance, so that shift should not
matter much.

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Sam_Odio
Short: You are right that a stock buyback is a technique, like dividends, to
return capital to existing investors. However, stock buybacks are also a
technique used by firms that believe their stock is underpriced, and is likely
what is happening here.

Long: To say that a firm's equity is "underpriced" is to say that the firm
believes it is expensive (risk-adjusted), compared to it's debt.

This implies a two things:

* Asymmetric information - that the firm knows something the market doesn't.

* That the firm is at a sub-optimal weighted average cost of capital, and can reduce the cost of its capital by restructuring.

As found by MR Leary at Duke and cited by 600 others[1], firms resolve this
situation by rebalancing their capital structure. One way to do this is to
issue debt at a low interest rate to buy back the firm's "expensive" stock.

The Modigliani–Miller theorem that you reference does indeed argue that
capital structures don't matter and that rebalancing shouldn't need to occur.
However the theory doesn't apply in practice since it assumes the absence of
asymmetric information, taxes, and the presence of an efficient market [2].

1\.
[http://scholar.google.com/scholar?cluster=179408952930709446...](http://scholar.google.com/scholar?cluster=17940895293070944684&hl=en&as_sdt=0,5)

2\.
[http://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theor...](http://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theorem)

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defactoserfdom
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

