The Strategic CFO -- Capitalizing on Undervaluation -- Pericom Semiconductor and Broadcom Case Studies -- The Cashless Buyback(TM) and Precedent Transactions
32 Pages Posted: 3 Nov 2015 Last revised: 28 Dec 2015
Date Written: December 27, 2015
A Cashless Buyback™ is a low risk transaction that enables a public corporation to capitalize in size on a period of substantial equity undervaluation. Secondary benefits for a firm include increased trading volume, a broader investor base, elimination of short interest, improved equity capital market access, and important merger and acquisition (M&A) considerations. The transaction is an attractive supplement or superior alternative to a traditional stock buyback program. Because it is low risk, it can be confidently implemented in size. This report underscores M&A considerations of Cashless Buybacks™ through 2 case studies.
Pericom Semiconductor (PSEM) - In 2013 and 2014, Cashless Buyback™ proposals were delivered to Pericom when it was trading at about $8.00 per share (about $182 million equity market cap). In September 2015, Pericom received two takeover bids offering about $18.00 per share. Had Pericom elected to implement either of the Cashless Buyback™ proposals it received, the takeover offers would have been priced about $12.00 higher, and, regardless of whether either takeover proposal closed, Pericom would have received roughly a $274 million, tax-free, cash, “equity bonus” payment worth about $12.00 per share.
Broadcom Corporation (BRCM) - In 2013, a Cashless Buyback™ proposal was delivered to Broadcom when it was trading at $25.32 per share ($14.7 billion equity market cap). In May 2015, Avago agreed to acquire Broadcom for over $54.50 per share. Had Broadcom elected to implement the 2013 Cashless Buyback™, the Avago offer would have been priced nearly $24.00 per share higher, and, regardless of whether the takeover closed, Broadcom would have received a $14.5 billion, tax-free, cash, “equity bonus” payment worth nearly $24.00 per share.
A list of Cashless Buyback™ precedent transactions is provided. The instrument used in a Cashless Buyback™ has features similar to those of Performance Rights (PRs), Conversion Rights (CRs), Contingent Value Rights (CVRs), convertibles and options. Insofar as a Cashless Buyback™ is composed of these tried-and-true elements, it is not “new”. Still, this exact transaction has not been done, and no CFO is eager to be first. Tech firms feed on innovation, but their CFO’s survive through prudence. Pericom and Broadcom are not the only firms to miss a chance to profit from a Cashless Buyback™, but missed opportunities go untallied. Until the first successful Cashless Buyback™ attracts attention, the instrument may gather dust, the left-handed, counter-twist do-hickey of every CFO’s tool kit.
Keywords: Cashless Buyback (tm), Pericom, Broadcom,Conversion Right, CR, Contingent Value Right, CVR, Performance Right, VeriSign, VRSN, Stamps.com, Electronics for Imaging, EFII, Cirrus, CRUS, Autodesk, Texas Instruments, TXN, Synopsys, SNPS, Intersil, Exar, Avid Technology, AVID, Applied Micro Circuits
JEL Classification: G30, G31, G34
Suggested Citation: Suggested Citation