Micron Technology, Inc.: Riding the Wave—Refinancing Convertible Notes

Abstract

In 2013, Micron Technology (Micron), a leading provider of advanced memory solutions, was finally having a good year after several difficult years. In July, its share price rose above $14, an increase of more than 100% since the beginning of the year. In light of the recently improved performance, Ronald C. Foster, vice president of finance and CFO, was reevaluating the firm's financing policies. Micron had historically made heavy use of convertible debt financing to fund its operations and strategic goals and, as of August 31, 2013, it had close to $3 billion of outstanding convertibles. These bonds had been issued between 2007 and 2013, when Micron's share price had been below $10 and its earnings were negative. The firm's current stock price was above the conversion price on all of its outstanding convertible bonds, and in some cases even above the provisional call triggers. Should Micron's stock price continue to rise, its capital costs would increase, and potentially greater wealth would be transferred from the firm's shareholders to bondholders.Micron's investment bankers had recommended refinancing its 2014 Notes and Series A bonds (the bonds currently eligible to be called) with new convertible notes. The new notes would most likely require a higher annual coupon rate than the retired bonds, but the conversion price would be reset to around $19, a 35%-to-40% premium over its recent stock prices. Foster needed to be convinced that the costs in time and money justified refinancing the bonds.The Micron case offers students an opportunity to consider why firms might find convertible bonds an attractive form of financing. Due to its heavy use of convertibles, Micron has carefully staggered the maturities on the bond issues and chosen different settlement options to reduce dilution. Students are asked to evaluate the terms of the new converts to see if they represent a reasonable exchange of value between the issuer and investors. In addition, they are asked to compare the capital costs associated with the new convert to the retired bonds to judge how Micron's capital costs are affected by the refinancing decision. This case has been used in Darden's Corporate Financing elective as an introductory case and would work well in any course that considers various financing options. Excerpt UVA-F-1719 Rev. Jul. 27, 2015 Micron Technology, Inc.: Riding the Wave—Refinancing Convertible Notes It had been an unusually long and hot summer in Boise, Idaho, in August 2013. It had also been a hot year for Micron Technology (Micron), a leading provider of advanced memory solutions. In July, its share price rose above $ 14, an increase of more than 100% since the beginning of the year. The company announced its first quarter of positive earnings in May 2013 after seven continuous quarters of losses. In July 2013, Micron finally completed the JPY200 billion ($ 2.2 billion) acquisition of Elpida Memory, Inc., Japan's largest dynamic random-access memory (DRAM) maker, after agreeing to purchase it out of bankruptcy in May 2012. . . .