Infineon Technologies: Time to Cash in Your Chips?

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Question 3. Cash Holding

The concept of cash hoarding stands for the accumulation of cash within the balance sheets of companies. It is a widespread practice among technology and pharmaceutical companies or in the field of healthcare. The largest cash hoardings take place in three types of companies, regardless of the size: Companies that do not pay dividends, companies that have recently went public and companies in industries with the largest increase in idiosyncratic volatility. Three main reasons explain why a company doesn’t distribute its excess cash: Uncertainty of the economic environment, recession and security and availability of funding. Hoarding cash will give the company flexibility, reduced dependence on external funding, greater number of options for future growth and avoid paying repatriation taxes. However, it also might cause dissatisfaction of investors, increases the possibility of a hostile takeover, agency costs in terms of managerial decisions influenced by bonus payment conditions.

Moving to Infineon case, while returning cash to shareholders seemed reasonable, the flexibility provided by Infineon’s cash reserves was crucial given the sector’s cyclical and capital-intensive nature. Infineon shared the sector’s main traits: cyclicality, long lead times for new technology and manufacturing capacity, intense rivalry and fast-paced innovation. All these traits provided good arguments to hoard cash. Moreover, the sector, whose average growth has been above GDP growth for decades, was highly correlated with macroeconomic fluctuations. However, we should also take into account that the “reshaped” Infineon was safer, entailing exclusive, long-term relationships with customers and setting prices contractually. These aspects could be strong enough in order to try to diminish the cash hoardings and disbursing some cash as dividends. Given its leadership in target markets, complete product portfolio and blue-chip customers, Infineon saw no strategic need for M&A.

From the arguments presented in the previous paragraphs, we consider that Infineon is in a right and appropriate financial position to take the decision to reduce its cash hoardings. Nevertheless, we do not see any need to increase the proportion of debt within the current capital structure (Equity: 95%; Debt: 5%), given the healthy financial situation of the company and the lack of need of external funding. Consequently, although the absolute amount of Equity will be reduced due to the disbursement of cash, the company will keep the same capital structure.

Question 4.

Companies choose to pay out cash to shareholders for several reasons: 1. Provide shareholders with a tangible return on investment or with a steady cash flow. 2. Signal to the market that it is a reliable company, as risky or unreliable companies can’t afford to pay out dividends consistently. 3. There are no other projects, or acquisitions with significant prospects to invest in. 4. In the case of agency issues, where management wants to artificially inflate the share price to increase their bonus. 5. Protect itself against hostile takeovers.

Currently, Infineon has a very large cash position, of 2.7b, 46% of total assets. The planned capex for 2013 is close to 900m, but could potentially increase to 1080m. Even considering the past liquidity issues, the amount is still very high, because apart from the capex and R&D, there are no other significant future expenditures. The current market is not favorable to acquisitions, and the debt is not yet due. Furthermore, holding such large amounts of cash is unfavorable, because the return on cash is very low, and taxable. The CEO, Peter Bauer has expressed that he is committed to regular dividends and buybacks. This would be a signal to the market that after a quite unstable time, Infineon can be considered a reliable investment again.

We would argue that Infineon’s primary objective in paying out cash is to get rid of excess cash. Apart from the planned CAPEX and R&D investments, there are no other opportunities. There is also no possibility of M&A, and no debt to pay. Currently the cash is earning very little return, so it would be better for the shareholders to reinvest it themselves. A bonus to achieving the primary objective would of course be the positive market signal that would come with it.

Question 5. Payout Methods

Regular Cash dividends:

Pros: 1. Positive signal to the market, much needed given Infineon’s past performance. 2. Favorable for attracting large institutional investors. Cons: The future is uncertain, and dividends are not flexible. Infineon might not be able to pay in the future, or might want to invest more, or do M&A. Quitting the dividends would be a bad signal to the market.

Onetime special dividend:

Pros: There is no commitment to pay dividends in the future, so Infineon does not have to keep paying these dividends. If future M&A/R&D opportunities arise, they could pursue them without forgoing the dividend. Cons: High dividend tax could be a disadvantage for investors.

Open market repurchases

Pros: 1. As Infineon would be buying shares at the market price, there is no premium, and the stock is currently underpriced, making this option is cheaper. 2. The price increase is quite subtle, so if the share is not underpriced, it will remain closer to the true value. 3. Does not create investor future expectations. 4. Increases stock ownership of equity holders who don’t sell, better aligning the incentives of management with investors. This adds the bonus of some protection against hostile takeovers. Cons: 1. Investors could see this as a negative signal, that management cannot create investment opportunities. 2. The maximum amount of shares that can be bought is limited. The average liquidity in 2011 was about 50m, share price around 7. So the maximum amount of cash that could be redistributed is 87.5m[4].

Fixed-price self-tender offer

Pros: 1. Management would be able to set the price at which they think the stock should be priced. 2. Very positive signal to the market, causing the stock to no longer be underpriced. Cons: 1. If market signaling is not the primary objective, the premium is too high. 2. If the stock is not underpriced, the price increase will fall away over time, together with investor confidence.

Dutch auction self-tender offer

Pros: 1. The premium paid is lower than for