The Fed Fuels Overcapacity

Feeding the Tech Zombies

The Fed is "keeping the walking dead alive," contends Mark FitzGerald, semiconductor analyst at Banc of America Securities, noting there've been no big bankruptcies or mergers in the chip space despite the industry's worst-ever recession. "The marginal suppliers, both chip and equipment, need to exit the business or be consolidated before a healthy recovery in profits can begin."

Granted, for as long as weak players are kept afloat, investors don't have to worry about losing the value of their stocks via bankruptcy. But neither can they realistically hope for decent profit growth, since the resulting overcapacity keeps companies from regaining any pricing power.

"Certainly this current availability of easy money through many of these convertible bond deals has made it less likely that you're going to see some consolidations, primarily because some of these companies now have more cash on hand," agreed Jim Liang, a semiconductor analyst for Pacific Growth Equities. "In that respect it delays the ultimate resolution of overcapacity."

Recent offerings of securities that start as bonds but may later be converted (hence the name) into equity include a $200 million deal last week from RF Micro Devices (RFMD Quote - Cramer on RFMD - Stock Picks).

Preaching to the Converted

The boom time for converts isn't limited to the tech sector, as the accompanying chart reflects. A record number of convertible deals, 53, were priced in June, according to Morgan Stanley's ConvertBond.com. The $16.9 billion in proceeds -- following $14.7 billion in May -- was the highest month since $20.8 billion in May 2001.

Cash Converts A sampler of recent convertible bond deals
Issuer	Ticker	Business	Total Amount filed (millions)
Cell Therapeutics	CTIC	Biotech	$75
Continental	CAL	Airline	175
Cypress Semiconductor Corp	CY	Semiconductors	500
EDS	EDS	IT Consulting	600
Lattice Semiconductor	LSCC	Semiconductors	200
LSI Logic Corp	LSI	Semiconductors	350
RealNetworks	RNWK	Internet	100
Reliant Resources	RRI	Energy	225
RF Micro Devices	RFMD	Semiconductors	200
WebMD	HLTH	Health	300
WesternWireless	WWCA	Wireless	175
Xerox	XRX	Imaging	920
Source: Banc of America, ConvertBond.com and TSC.

The flood of cash from convertible bond offerings only compounds the balance sheet distortions that are a legacy of the late 1990s. Skeptics such as Bernstein believe the "balance sheet repair" story is largely a myth.

« Previous Page

1 2 3 4

Next Page »