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Principles: Life and Work
The Intelligent Investor, Rev. Ed
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
In June 2004, the biotech company Cephalon Inc. wanted to raise money an its old debt.
•
It thumbed its nose at this year's low rates.
•
In fact, it didn't want to pay any interest at all on its new bonds.
•
It was able to fashion a 0%, $750 million offering of so-called contingent co bonds that investors snapped up with the help of an accounting loophole.
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
Raising money by selling bonds at little or no apparent cost is great for corp bottom lines, but not so great for unsuspecting shareholders.
The bonds carry below-market interest rates because investors, typically he get a conversion option -- the right to swap their bonds for stock -- instead payments.
And, just as with the stock options granted to employees, companies don treat the conversion options as an expense under generally accepted accou
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
Even more critical for investors, companies -- when counting their outstand don't have to include the shares that would be issued if the bonds were co stock. So shareholders can get hit with a nasty surprise.
Accounting analysts at Bear, Stearns & Co. say companies issuing co-cos wo their earnings per share slip by an average of 6% if the conversion options w included in the calculation.
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
•
For their part, the companies say they aren't hiding anything.
•
Instead, they're doing the deals to get cheap capital, they say.
•
•
Robert S. "Chip" Merritt, senior director of investor relations at Cephalon, sa company has been straight with the market.
"Any professional investor would understand that this conversion could occ would have modeled for it appropriately," he says.
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
Investors can blame clever investment bankers for this latest maneuver tha step ahead of the regulators.
Merrill Lynch, Credit Suisse First Boston, and Banc of America Securities are of the co-co so far.
Tyco International Ltd. (TYC) is believed to have issued the first co-co in 200 underwritten by Merrill Lynch & Co. shortly after a proposed rule on conve the Financial Accounting Standards Board omitted contingency conversions
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
The advantage of co-cos is simple. With regular convertible bonds, companies must count the shares that m when figuring their per-share GAAP earnings.
But they can postpone the dilution if they add another condition, or contin the standard convertible terms.
For example, when CSFB underwrites a co-co, it usually allows the switch to
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
Issuing a co-co rather than a regular convertible postpones the day of recko Cephalon.
But if its stock reaches the trigger level, the company's shares would suffer dilution, clobbering its per-share earnings because bondholders could shift
Bear Stearns estimates that if this occurred next year, the hit could be 15% that has happened to some companies.
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
So investment bankers have devised another product to deal with this prob hedge to offset the dilution.
But the hedges are expensive. Cephalon, for example, paid CSFB some $258 one that would pay the company in cash or shares and help maintain the e share if its bonds are converted.
But that's a huge slice of the $750 million Cephalon raised by selling the bo first place.
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
So investment bankers have devised another product to deal with this prob hedge to offset the dilution.
But the hedges are expensive. Cephalon, for example, paid CSFB some $258 one that would pay the company in cash or shares and help maintain the e share if its bonds are converted.
But that's a huge slice of the $750 million Cephalon raised by selling the bo first place.
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FM-1 Uploaded by Anonymous 1fAxO4 Principles: Life and Work
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
•
There's method to this apparent I-pay-you, you-pay-me madness.
•
Cephalon counts the $258 million as an expense against its taxable income
•
•
Figured at the maximum 35% corporate tax rate, the result is a $90 million t enough to cover the $80 million difference between what Cephalon paid CS what it got back. Cephalon says the $178 million it retrieved from CSFB doesn't affect its tax
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
Meanwhile, FASB is playing catch-up.
It has toyed with the options issue since at least 1990 and might propose a the end of the year that would close the contingency exception for counting behind a convertible.
But if the past is any guide, the bankers will have found the next loophole b new rule takes effect, leaving investors with another variation of the by-no riddle: How much did my company really earn?
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0
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
Hidden Cost By adding extra conditions to traditional convertible bonds, companies can avoid revealing how much earning would be diluted if the bonds were exchanged for stock.
Potential Dilution (per share earning) Year 2004 Celphalon
15%
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
In June 2004, the biotech company Cephalon Inc. wanted to raise money an its old debt.
•
It thumbed its nose at this year's low rates.
•
In fact, it didn't want to pay any interest at all on its new bonds.
•
It was able to fashion a 0%, $750 million offering of so-called contingent co bonds that investors snapped up with the help of an accounting loophole.
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
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FM-1 Uploaded by Anonymous 1fAxO4 Principles: Life and Work
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•
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
Raising money by selling bonds at little or no apparent cost is great for corp bottom lines, but not so great for unsuspecting shareholders.
The bonds carry below-market interest rates because investors, typically he get a conversion option -- the right to swap their bonds for stock -- instead payments.
And, just as with the stock options granted to employees, companies don treat the conversion options as an expense under generally accepted accou
Documents Career & Money
0
2 views
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0
FM-1 Uploaded by Anonymous 1fAxO4 Principles: Life and Work
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•
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
Even more critical for investors, companies -- when counting their outstand don't have to include the shares that would be issued if the bonds were co stock. So shareholders can get hit with a nasty surprise.
Accounting analysts at Bear, Stearns & Co. say companies issuing co-cos wo their earnings per share slip by an average of 6% if the conversion options w included in the calculation.
Documents Career & Money
0
2 views
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0
FM-1 Uploaded by Anonymous 1fAxO4 Principles: Life and Work
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
•
For their part, the companies say they aren't hiding anything.
•
Instead, they're doing the deals to get cheap capital, they say.
•
•
Robert S. "Chip" Merritt, senior director of investor relations at Cephalon, sa company has been straight with the market.
"Any professional investor would understand that this conversion could occ would have modeled for it appropriately," he says.
Documents Career & Money
0
2 views
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0
FM-1 Uploaded by Anonymous 1fAxO4 Principles: Life and Work
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•
•
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
Investors can blame clever investment bankers for this latest maneuver tha step ahead of the regulators.
Merrill Lynch, Credit Suisse First Boston, and Banc of America Securities are of the co-co so far.
Tyco International Ltd. (TYC) is believed to have issued the first co-co in 200 underwritten by Merrill Lynch & Co. shortly after a proposed rule on conve the Financial Accounting Standards Board omitted contingency conversions
Documents Career & Money
0
2 views
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0
FM-1 Uploaded by Anonymous 1fAxO4 Principles: Life and Work
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•
•
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
The advantage of co-cos is simple. With regular convertible bonds, companies must count the shares that m when figuring their per-share GAAP earnings.
But they can postpone the dilution if they add another condition, or contin the standard convertible terms.
For example, when CSFB underwrites a co-co, it usually allows the switch to
Documents Career & Money
0
2 views
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0
FM-1 Uploaded by Anonymous 1fAxO4 Principles: Life and Work
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•
•
•
Principles: Life and Work
The Intelligent Investor, Rev. Ed
Issuing a co-co rather than a regular convertible postpones the day of recko Cephalon.
But if its stock reaches the trigger level, the company's shares would suffer dilution, clobbering its per-share earnings because bondholders could shift
Bear Stearns estimates that if this occurred next year, the hit could be 15% that has happened to some companies.
Documents Career & Money
0
2 views
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0
FM-1 Uploaded by Anonymous 1fAxO4 Principles: Life and Work
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•
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
So investment bankers have devised another product to deal with this prob hedge to offset the dilution.
But the hedges are expensive. Cephalon, for example, paid CSFB some $258 one that would pay the company in cash or shares and help maintain the e share if its bonds are converted.
But that's a huge slice of the $750 million Cephalon raised by selling the bo first place.
Documents Career & Money
0
2 views
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0
FM-1 Uploaded by Anonymous 1fAxO4 Principles: Life and Work
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•
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
So investment bankers have devised another product to deal with this prob hedge to offset the dilution.
But the hedges are expensive. Cephalon, for example, paid CSFB some $258 one that would pay the company in cash or shares and help maintain the e share if its bonds are converted.
But that's a huge slice of the $750 million Cephalon raised by selling the bo first place.
Documents Career & Money
0
2 views
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0
FM-1 Uploaded by Anonymous 1fAxO4 Principles: Life and Work
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
•
There's method to this apparent I-pay-you, you-pay-me madness.
•
Cephalon counts the $258 million as an expense against its taxable income
•
•
Figured at the maximum 35% corporate tax rate, the result is a $90 million t enough to cover the $80 million difference between what Cephalon paid CS what it got back. Cephalon says the $178 million it retrieved from CSFB doesn't affect its tax
Documents Career & Money
0
2 views
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0
FM-1 Uploaded by Anonymous 1fAxO4 Principles: Life and Work
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
Meanwhile, FASB is playing catch-up.
It has toyed with the options issue since at least 1990 and might propose a the end of the year that would close the contingency exception for counting behind a convertible.
But if the past is any guide, the bankers will have found the next loophole b new rule takes effect, leaving investors with another variation of the by-no riddle: How much did my company really earn?
Documents Career & Money
0
2 views
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0
FM-1 Uploaded by Anonymous 1fAxO4 Principles: Life and Work
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Principles: Life and Work
The Intelligent Investor, Rev. Ed
Hidden Cost By adding extra conditions to traditional convertible bonds, companies can avoid revealing how much earning would be diluted if the bonds were exchanged for stock.
Potential Dilution (per share earning) Year 2004 Celphalon
15%
