Issuing Case Study: Corning Inc. Operates In Telecommunication

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CORNING CASE MEMO
Corning Inc. operates in telecommunications (telecom), advanced materials, and information display. The majority of its revenues comes from its telecom businesses in fiber and cable, hardware and equipment, and photonics. Strategic keys to the company’s success include a large research and development (R&D) component and also an affinity for strategic mergers and acquisitions (M&A).
Corning was heavily impacted by the bursting of the tech bubble in early 2001. Given the company’s current need for cash, vice chairman and CFO James Flaws now faces a perplexing decision of whether to issue mandatory convertible preferred stock or not. Is this a viable option to generate quick cash? Or is the risk of alienating existing shareholders
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Issuing equity sends a bad signal to investors about the prospects of your company and essentially admits to having a cash problem. Investors will interpret the issuance as management believing that the company’s current shares are too high. The combination of the increased number of shares and the possible negative reaction from the public would lead to dilution of shares for Corning’s current shareholders. There are also two drawbacks to issuing debt that are specific to Corning’s current situation. For Corning to maintain their $2 billion revolving line of credit, they must keep a debt to capital ratio of less than 60%. As of June 2002, Corning’s debt to capital ratio is 57.24%. Therefore, any significant debt issuance would cause Corning’s bank to eliminate their credit line. The other drawback is Standard & Poor’s and Moody’s have just downgraded Corning’s corporate debt to junk status meaning any debt they negotiate would surely be subject to a higher interest rate.
Using Black-Scholes to Calculate the Theoretical Value of the Preferred Convertible
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The securities are attractively priced at $100. If the value of these securities remains at $106.81, investors could dynamically hedge to capture the $6.81 arbitrage. The biggest threat to investors purchasing this security is the common shareholders/public’s reaction to this issuance. If the market reacts poorly and views the issuance as a bad signal, then the value of Corning’s stock would fall and, in turn, so would the theoretical value of the preferred convertibles. For Corning, pricing a security worth $106.81 at $100 may seem like an unfair deal. However, given Corning’s current financial distress, this may be the most reasonable method of financing. The risk still remains that the market will react poorly to this issuance. I believe $100 is approximately the most Corning would be able to charge for these convertible securities and the $6.81 discount should be viewed as a cost of financial distress.
J.P. Morgan Has Proposed a Security That Will Benefit Investors and Address Corning’s

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