Feeding the Tech ZombiesThe 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).
Preaching to the ConvertedThe 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)|
|Cypress Semiconductor Corp||CY||Semiconductors||500|
|LSI Logic Corp||LSI||Semiconductors||350|
|RF Micro Devices||RFMD||Semiconductors||200|
|Source: Banc of America, ConvertBond.com and TSC.|