Harvard Case - Symantec Corporation Convertible Notes With Call Spread
"Symantec Corporation Convertible Notes With Call Spread" Harvard business case study is written by Walid Busaba, Zeigham Khokher, Guorong Yang. It deals with the challenges in the field of Finance. The case study is 7 page(s) long and it was first published on : Sep 19, 2012
At Fern Fort University, we recommend that Symantec Corporation proceed with the issuance of convertible notes, incorporating a call spread strategy to manage potential risks associated with the fluctuating market conditions. This approach will allow Symantec to access capital while mitigating potential dilution and offering flexibility in managing the debt structure.
2. Background
Symantec Corporation, a leading cybersecurity software and services provider, is facing a challenging financial landscape. The company is seeking to raise capital to fund growth initiatives and manage its existing debt load. The case study presents the dilemma of choosing between issuing traditional debt or convertible notes, each with its own advantages and drawbacks. The primary protagonists are the Symantec management team, tasked with making the optimal financial decision for the company.
3. Analysis of the Case Study
The case study can be analyzed through the lens of Financial Strategy, focusing on the interplay between Capital Structure, Debt Management, and Risk Management. The key elements to consider are:
- Debt Financing: Traditional debt offers a lower cost of capital but exposes Symantec to fixed interest payments and potential financial distress if earnings decline.
- Convertible Notes: Convertible notes offer flexibility by allowing investors to convert their debt into equity, potentially diluting existing shareholders. However, they also present a lower cost of capital than traditional debt and can be structured to mitigate dilution risks.
- Call Spread Strategy: This strategy involves buying a call option with a lower strike price and selling a call option with a higher strike price. This allows Symantec to profit from potential stock price increases while limiting potential losses.
Financial Analysis:
- Financial Statements: Analyzing Symantec's financial statements reveals a healthy balance sheet with ample cash reserves. However, the company's profitability is under pressure due to intense competition in the cybersecurity market.
- Capital Budgeting: Symantec's growth initiatives require significant capital investment, highlighting the need for efficient capital allocation and maximizing return on investment (ROI).
- Risk Assessment: The case study emphasizes the importance of considering market volatility and potential dilution risks associated with convertible notes.
4. Recommendations
Symantec should proceed with the issuance of convertible notes, incorporating a call spread strategy to manage potential risks. This approach offers the following benefits:
- Capital Access: Convertible notes provide access to capital at a lower cost than traditional debt, allowing Symantec to fund growth initiatives and manage existing debt.
- Flexibility: The conversion feature offers flexibility for investors, potentially mitigating dilution risks for existing shareholders.
- Risk Mitigation: The call spread strategy provides a hedge against potential stock price fluctuations, limiting downside risk for Symantec.
Implementation:
- Structure the convertible notes: Define conversion terms, maturity date, and interest rates to balance investor incentives with Symantec's financial objectives.
- Implement the call spread: Determine the strike prices and expiration dates for the call options, considering market volatility and Symantec's stock price outlook.
- Monitor and adjust: Continuously monitor market conditions and adjust the call spread strategy as needed to manage risk and maximize potential returns.
5. Basis of Recommendations
The recommendations are based on the following considerations:
- Core competencies: Symantec's core competency lies in cybersecurity, requiring significant investment in research and development. Convertible notes provide a cost-effective way to fund these initiatives.
- External customers: Convertible notes offer flexibility and potentially lower cost of capital, which can benefit Symantec's customers through improved product offerings and services.
- Competitors: The cybersecurity market is highly competitive, requiring Symantec to maintain a strong financial position to compete effectively.
- Attractiveness: The call spread strategy provides a quantifiable risk mitigation strategy, potentially improving Symantec's overall profitability and shareholder value.
- Assumptions: The recommendations assume that Symantec's stock price will experience moderate growth in the future, justifying the use of convertible notes and the call spread strategy.
6. Conclusion
Issuing convertible notes with a call spread strategy offers a viable and strategic solution for Symantec to access capital, manage risk, and maintain its competitive edge in the cybersecurity market. This approach balances the need for capital with the potential for dilution and offers a flexible and cost-effective way to achieve Symantec's financial objectives.
7. Discussion
Alternative Options:
- Traditional debt: This option provides a lower cost of capital but exposes Symantec to fixed interest payments and potential financial distress.
- Equity financing: This option could dilute existing shareholders and may not be feasible given Symantec's current stock price.
Risks and Key Assumptions:
- Stock price volatility: The call spread strategy relies on the assumption of moderate stock price growth. Significant price declines could result in losses for Symantec.
- Market conditions: Changes in market interest rates or investor sentiment could impact the attractiveness of convertible notes.
- Dilution: While the call spread strategy mitigates dilution risks, it cannot eliminate them entirely.
8. Next Steps
- Due diligence: Conduct thorough due diligence on the convertible notes market and identify potential investors.
- Negotiation: Negotiate terms with investors to ensure a favorable structure for Symantec.
- Issuance: Complete the issuance of convertible notes and implement the call spread strategy.
- Monitoring and adjustment: Continuously monitor market conditions and adjust the strategy as needed.
By carefully considering the financial implications and implementing a well-structured approach, Symantec can leverage the benefits of convertible notes with a call spread strategy to achieve its financial objectives while managing risk and maximizing shareholder value.
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Case Description
The board of directors of Symantec Corporation asked a consultant for an independent opinion on an important financing decision. Symantec had been working with several investment banks on a plan to raise debt to repurchase common shares. The consultant found it to be an interesting financing plan; whereas repurchasing shares immediately would increase Symantec's financial leverage, converting the notes in the future would reduce leverage at a potentially significant dilutive cost to the firm's equity. More interestingly, the company negotiated with the investment banks to buy a call spread on its own stock, covering the same number of shares as would be issued to noteholders upon conversion. After reviewing the proposal, the consultant tried to understand the motivation behind the structure of the transaction. Why would Symantec choose to issue convertible bonds, and why would it intend to buy the call spread?
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