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Corning Convertible Preferred Stock

Corning Convertible Preferred Stock

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Published by Gabriel Jiabei Gao

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Published by: Gabriel Jiabei Gao on Jan 02, 2013
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09/21/2013

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Corning Convertible Preferred Stock 
Gabriel Gao
 
SUMMARY OF CORNING ORGANIZATION
 TelecommunicationsDisplay TechnologiesEnvironmental TechnologiesSpecialtyMaterialsLifeSciences
Founded in 1851 as a manufacturer of glass products
By the late 1990s, transformed into ahigh-tech company 
By 2000s, Corning has only threesegments (shaded in blue)
Soaring fiber optic sales in late 1990s
Market price increased by factor of 12between late 1998 and Fall 2000
Corning (and other telecom stock)continue to rise in 2000 even after the 2000dot.com and Nasdaq crash
Expansion using massive equity raising 
 Tech Bubble
When high-tech firms crashed in2000/01, demand fell sharply, causing Corning stock price to plummet
Financial distress and negative cash flow 
In danger of violating D/E covenants forlarge outstanding loans; needed new equity infusion to satisfy these covenants
Market Crash
63%22%15%
 TelecommunicationsSpecialty MaterialsDisplay Technologies
Prepared for Finance 335 1
 
Prepared for Finance 335 3
SECURITY DESIGN
Corning needs new equity to make its 60%D/A requirement
Violating covenants will lead to bankruptcy 
Cash flow from operating activities weredeteriorating - Strong cash flow through 2001- Turned negative in first half in 2002
Earning are also negative in 2002
Still holds $1.3B in cash and equivalents
Even though cutting costs such as overheadsignificantly, sales are falling even quicker
Funding RequirementsDrawbacks of Equity Financing
 
Signaling:
- For a distressed high-tech firm, theremay be a lot of asymmetric informationpossessed by management- Issuing equity may strongly signal thatmanagers think share price still too high
Severe dilution effect:
- Market is likely to react negatively toshare issue
 
 Time-consuming
for issuing equity 
 
Speed:
can issue this security quicker than equity 
 
Guarantee:
offer “free candy” (discount) to investors in order to obtain the capital
 
 
Disguise:
Do not want to make the issuing at discount too obvious
 
 Why issue such a security now:
 Appeal to hedge funds because ONLY they have money 
 Why Mandatory Convertible Preferred Stock?

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