Corporate Finance Session 8 — Infineon Technologies: Payout Policies
Using the example of Infineon Technologies. (“Infineon Technologies/ Time to Cash-In
your chips” HBS Case)
Link to the case
This is the last session of the Capital Structure module: pulling together all the
available elements of analysis we’ve studied throughout the course and applying
them to Infineon !
What are the main characteristics of Infineon as a business?
- They are a fab and actually produce the products – design and manufacture, a bit
more of a traditional company in that sense
- They operate in chips, a highly CYCLICAL market, with very frequent updates to the
tech, implying high R&D and CapEx requirements (capital-intensive model, heavy
investments needed in physical and immaterial assets)
- Infineon sold off their memory chips/communication division in an effort to de-risk
the business
o Memory was a highly risky unit in terms of pricing volatility: memory chips
are more of a community, with no need to be customised as a product
o NO customer loyalty for the memory unit (commodity) + high price volatility
(customers want as cheap as possible) => not very profitable
- Focus on the business units where they can establish long-term contracts with
customers, involving customization etc.
- Very long lead times (e.g., 2/3 years to build a clean room in which you make and
test the chips) which means you have to keep on investing no matter which stage of
the market cycle you’re in!
- When the cycle is up, customers of Infineon buy chips and stack up inventories
because chips are essential, and then in the bad times no one buys because they
have stocked up on the chips… this further adds to volatility of cashflows
- Revenues are already pretty volatile with constant investment needs, so hence the
need to get rid of the riskiest-among-the-risky parts
- Intense competition as well + fast-paced innovation in product/process (R&D)
- Economies of scale possible as high fixed costs > you want scale and have not so
much debt when there is a lot of competition: when demand is low, you wanna be
able to slash your prices so that your smaller, more leveraged competitors will go
bust!
- Many LONG-TERM customers and exclusive relationships (/!\ only now that the
more commodity part of the business was sold off)
, Infineon’s financial policy and Capital Structure
- Net Working Capital (NWC) decreasing over time is a SOURCE OF FUNDS > positive
cashflow if change in NWC is negative
o Why? Inventories & receivables are going down while payables are going
up, meaning Infineon is slowly managing their NWC more efficiently
- Their profits are also increasing > selling more while receivables going down,
meaning they are managing the Cash Conversion Cycle better
- Fluctuating Plant, Property & Equipment (PPE): if depreciation in a CapEx heavy
model is linear, you suddenly get rid of some assets/while investing in new plants
that take a lot of time to be build > means your PPE shoots up when they’re finished
- Other net assets: a big part is Goodwill > if you get rid of the business unites that
were associated with that Goodwill, your Net Other is falling because you divest
from those other assets and business units
- In aggregate, their Change in Net Operating Assets is declining => that’s a SOURCE
of Funds, which is adding to cashflows as Funding Surplus = NI - delta NOA
o The smaller what you deduct from net income, the higher your cashflows
- We can also see Debt is going all the way down > they’re paying it up + increasing
their cash pile!
- They’re generating a lot of cash, being soaked up by Cash Balances + used to repay
some of the debt
Main leverage ratios => use many different ones and spot the trend instead of using one
(1) Net debt over Book Capital (Book Cap = reorg BS)
(2) Net Debt over EV (or Market Value)
(3) Net Debt over Assets
(4) Net Debt over Firm Value
(5) Debt over Firm Value
(6) Cash over Firm Value
Using the example of Infineon Technologies. (“Infineon Technologies/ Time to Cash-In
your chips” HBS Case)
Link to the case
This is the last session of the Capital Structure module: pulling together all the
available elements of analysis we’ve studied throughout the course and applying
them to Infineon !
What are the main characteristics of Infineon as a business?
- They are a fab and actually produce the products – design and manufacture, a bit
more of a traditional company in that sense
- They operate in chips, a highly CYCLICAL market, with very frequent updates to the
tech, implying high R&D and CapEx requirements (capital-intensive model, heavy
investments needed in physical and immaterial assets)
- Infineon sold off their memory chips/communication division in an effort to de-risk
the business
o Memory was a highly risky unit in terms of pricing volatility: memory chips
are more of a community, with no need to be customised as a product
o NO customer loyalty for the memory unit (commodity) + high price volatility
(customers want as cheap as possible) => not very profitable
- Focus on the business units where they can establish long-term contracts with
customers, involving customization etc.
- Very long lead times (e.g., 2/3 years to build a clean room in which you make and
test the chips) which means you have to keep on investing no matter which stage of
the market cycle you’re in!
- When the cycle is up, customers of Infineon buy chips and stack up inventories
because chips are essential, and then in the bad times no one buys because they
have stocked up on the chips… this further adds to volatility of cashflows
- Revenues are already pretty volatile with constant investment needs, so hence the
need to get rid of the riskiest-among-the-risky parts
- Intense competition as well + fast-paced innovation in product/process (R&D)
- Economies of scale possible as high fixed costs > you want scale and have not so
much debt when there is a lot of competition: when demand is low, you wanna be
able to slash your prices so that your smaller, more leveraged competitors will go
bust!
- Many LONG-TERM customers and exclusive relationships (/!\ only now that the
more commodity part of the business was sold off)
, Infineon’s financial policy and Capital Structure
- Net Working Capital (NWC) decreasing over time is a SOURCE OF FUNDS > positive
cashflow if change in NWC is negative
o Why? Inventories & receivables are going down while payables are going
up, meaning Infineon is slowly managing their NWC more efficiently
- Their profits are also increasing > selling more while receivables going down,
meaning they are managing the Cash Conversion Cycle better
- Fluctuating Plant, Property & Equipment (PPE): if depreciation in a CapEx heavy
model is linear, you suddenly get rid of some assets/while investing in new plants
that take a lot of time to be build > means your PPE shoots up when they’re finished
- Other net assets: a big part is Goodwill > if you get rid of the business unites that
were associated with that Goodwill, your Net Other is falling because you divest
from those other assets and business units
- In aggregate, their Change in Net Operating Assets is declining => that’s a SOURCE
of Funds, which is adding to cashflows as Funding Surplus = NI - delta NOA
o The smaller what you deduct from net income, the higher your cashflows
- We can also see Debt is going all the way down > they’re paying it up + increasing
their cash pile!
- They’re generating a lot of cash, being soaked up by Cash Balances + used to repay
some of the debt
Main leverage ratios => use many different ones and spot the trend instead of using one
(1) Net debt over Book Capital (Book Cap = reorg BS)
(2) Net Debt over EV (or Market Value)
(3) Net Debt over Assets
(4) Net Debt over Firm Value
(5) Debt over Firm Value
(6) Cash over Firm Value
