Corning Inc.: Zero Coupon Convertible Debentures (a)

Abstract

In November 2000, a money manager needs to make a decision regarding an offering of convertible bonds by Corning. The analysis requires her to compare the insights available from standard descriptive ratios to those available from valuation analysis. This case is intended to be a student's first exercise in analyzing convertible bonds and assumes some familiarity with option pricing theory and bond valuation. In addition, the case highlights the importance of going beyond the convertible bond calculations. The volatility of Corning stock has increased in the past year, and makes the call option more valuable, but at the same time Corning appears to be issuing converts at a time when both its share price and stock market valuations are at historic highs. Thus it is imperative that the student “have a view” on the sustainability of stock market valuations and the outlook for Corning.

Excerpt

UVA-F-1339

Rev. Feb. 12, 2014

Corning, Inc.: Zero Coupon Convertible Debentures

due November 8, 2015 (A)

On November 8, 2000, Corning announced that it would issue $ 2.7 billion in zero-coupon convertible debentures priced at $ 741.923 per $ 1,000 principal amount. The initial public offering (IPO) price yielded 2% per annum to maturity, compounded semiannually. A summary of terms is given in Exhibit 1. Concurrent with the offering, Corning also conducted a separate public offering of 30 million shares of its common stock at $ 71.25 per share. Neither offering was contingent upon completion of the other. The entire financing would raise around $ 4.8 billion.

Corning planned to use the proceeds of both offerings to fund its acquisition of Pirelli S.p.A.'s 90% interest in Optical Technologies USA, Pirelli's optical-components and -devices business. The total acquisition consideration was approximately $ 3.6 billion in cash. The acquisition agreement had been announced on September 27, 2000, and pended regulatory approval. Observers agreed, however, that the acquisition was likely to be completed.

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Keywords: convertible bonds, option pricing theory, bond valuation