INTEL CORPORATION: A STRATEGIC ANALYSIS
..., moreover, the company has a number of subsidiaries, affiliated companies and licensees, which amounts to a rather mixed and flexible structure of control and portfolio decisions in particular. One should also envisage a possibility of inconsistent reporting across subsidiaries in distant legacies, which was in fact documented in the accounting changes section: for the purposes of reporting, the company has resorted to alternate depreciation accounting procedures which did affect the EPS section without reflecting symmetric changes in the taxation reports. On second thought, the issuance of additional equity would act to dilute EPS too, apart from other effects of such changes in the structure of capital to be discussed later on. In any event, exports and sales via FDI operations overseas accounted for some 50 percent of its revenues, which should be a good diversification (national business cycles do not co-move most of the time) and moreover a good underpinning to live up to the working capital and liquidity requirements imposed by the creditors or underwriters. On the other hand, such liquidity covenants as contingencies underlying further rollover terms cannot, strictly speaking, be subject to default per se. In other words, such harsh or strong prudential benchmarks may have little to do with objective performance actually monitored by the markets for all companies on a consistent basis. In that respect, Intel did wise to reduce the contingent debt share in its financing structure, as such financial leverage would be particularly complex and risky in terms of possibly wrong messages conveyed to the markets by sudden withdrawal or defecting on the part of the creditors. Such schemes act to not only aggravate the complexity of reporting (provoking excess sensitivity to bad news), but also put at threat the liquidity when its most critically needed. The company cannot afford such exposures in an increasingly competitive environment, much less in recession or at the declining stages for some of its mature products. What’s more, one should bear in mind that, it was largely the nonrecurring items or extraordinary events (force majeure or acts of God), in particular the overall global recession of the 1980s, that had caused the company to resort to that kind of debt financing vehicles. So, the ex post performance cannot be judged too harshly, let alone out of the context of ex ante constraints. Persistent weakness in some of its core markets and had forced its customers to cut capital expenditures, which downsizing decision is essentially no different from, and is symmetric to, the company’s choice to default on some of its working capital covenants. The investor community have to realize that , as well as the fact that the key ratios, such as the quick and the current ratio, are still solid. Moreover, only huge deviation off the covenants could become dangerous and symptomatic of fundamentals corruption or otherwise agency/governance issue. Not least, a default on select covenants amounts to partial relative property rights, which may be desolated and treated separately. Finally, it has to be taken into account that the auditing entity’s opinion was itself contingent subject to the scenarios and outcomes of the company’s negotiations with its lenders. In fact, that all resembles of the so-called three generations of models of financial and currency crises as in the mid-through late-1990s. Thus, it took time to develop a distinction between fundamentals crises versus liquidity crises whereby the otherwise promising economies might fall prey to irrational withdrawal decisions on several fronts: the sovereign debt ranking agencies like the Fitch IBCAs basing their decisions on their negotiations with lenders like the IMF and large private banks, whose decisions had prior to that been dominated by the so-called “Washington consensus” imposing draconian if myopic monetary policies on the recipient. Heavily indebted with corrupt balance of payments, the Latin and Asian economies were in the end subjected to free panic-monger capital flights, thus making the whole mechanism of crisis largely self-fulfilling. A similar, micro-level, perspective might be characteristic of the situation around the contingent claims and covenants shaping Intel’s right-hand side. After all, some of the bank credit lines and revolver facilities had been canceled, and there were no fundamental grounds to find them inept or deny them rationale behind the choice to default (as an alternative to market exit or Chapter 11). The change management program had to be multifaceted and nonpartial, rather than gradual and ad-hoc. Among other things, it involved product portfolio, team (human capital), and structure of capital (or new sources of financing). Human capital for the most part pertains to executives and entrepreneurial capacity, rather than technical workers per se. As the headcount reveals, the executives average age is not very young, and they might be a bit too conservative in terms of risk aversion and creative pursuits. To take an aggressive, proactive stance might moreover be an implicit prerequisite behind the public trusting in the company’s turnover odds. On the other hand, their executive incentive plan appear very effective and conducive to initiative taking and risk sharing on the part of the overall team (it links individual extra compensation to total performance without, however, threatening the hard base level, which does sterilize risk-aversion and encourages entrepreneurial experimenting). In fact, that could be the ultimate if single most proper way of valuing human capital while assessing its contribution in hard, measurable terms: linking compensation to performance that way actually makes such latent, unobservable interim facets technically irrelevant. Ironically, same rationale might apply to the investor community following the ...