Cypress Semiconductor: 1.25% Convertible Notes

8 Pages Posted: 14 Jun 2009

See all articles by Robert M. Conroy

Robert M. Conroy

University of Virginia - Darden School of Business

Abstract

The treasury department staff at Cypress Semiconductor Corporation (Cypress) had just received the final draft of the proposal for the pending $600 million convertible bond issue. This would be the latest in a series of convertible bond issuances by Cypress. But this time the situation was quite different. The last offerings were in 2000 when Cypress's stock price was trading in the $40 to $50 range for the year and had, in fact, hit a high of $57.75 in May 2000. The picture had changed dramatically in the last three years. One day earlier, on May 16, 2003, the closing price was $10.51. Of course, the situation had been the same for almost all high-tech stocks, but that did not make the prospect of issuing an equity-based security any less painful given the current stock price.

Excerpt

UVA-F-1532

Oct. 14, 2008

Cypress Semiconductor: 1.25% Convertible Notes

The treasury department staff at Cypress Semiconductor Corporation (Cypress) had just received the final draft of the proposal for the pending $ 600 million convertible bond issue. This would be the latest in a series of convertible bond issuances by Cypress. But this time the situation was quite different. The last offerings were in 2000 when Cypress's stock price was trading in the $ 40 to $ 50 range for the year and had, in fact, hit a high of $ 57.75 in May 2000. The picture had changed dramatically in the last three years. One day earlier, on May 16, 2003, the closing price was $ 10.51. Of course, the situation had been the same for almost all high-tech stocks, but that did not make the prospect of issuing an equity-based security any less painful given the current stock price.

The current proposal was to issue $ 600 million in new 1.25% 5-year convertible subordinated notes. The proceeds would be used to retire about $ 400 million in outstanding convertible notes that were due to mature in 2005 with coupon rates of 3.75% and 4.00%. These convertible notes had conversion prices of $ 62.50 and $ 49.36 respectively. Issuing a new convertible and retiring those outstanding bonds would result in substantial savings in interest costs over the next two years. But a major concern of management was the potential dilution effects associated with issuing a convertible bond when the stock price was so low. The staff was asked to review the proposal for pricing and to consider management's dilution concerns.

Cypress Semiconductor

. . .

Keywords: semiconductor, stock price, convertible bond, high-tech, equity based security, SRAM, call spread, hedging

Suggested Citation

Conroy, Robert M., Cypress Semiconductor: 1.25% Convertible Notes. Darden Case No. UVA-F-1532, Available at SSRN: https://ssrn.com/abstract=1418892

Robert M. Conroy (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://www.darden.virginia.edu/faculty/conroy.htm

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