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Infineon Technologies: Time to Cash in Your

Chips?
Autor:goldenarieNovember18,2016CaseStudy3,532Words(15Pages)28Views

Page 1 of 15

[pic1]InfineonTechnologies:TimetoCashinYourChips?

Question1.Infineonsbusiness
Infineonoperatesmainlyinthreesegments.Firstoneistheautomotivesector,which
accountsfor39%ofsales.Itmainlyprovidesvehicleelectronics,microcontrollers,powerchips
andsensorsforengine,safetysystemsandtransmissioncontrol.Secondsegmentisindustrialand
multimarket(IMM)whichgenerates45%ofsales.InIMMInfineonproducespowerchipstobe
usedinefficientgenerationandtransmissionforindustrialproductsorhomeappliances.Thirdly
ChipCard&Securityaccountsfor11%ofsales.Businessinthissectormainlyconsistsservicesand
productsforelectronicsecurityinchipcardsandmobiledevices.
TherearenewAsianmarketsandemergingplayersintheindustry.Infineoncouldfocus
stronglyonthesenewmarketssuchasAsiaorBRICScountriestostrengthenitspositionin
differentsteps.Firstly,Infineonproducestheirchipsinthecleanroomswithextremeaccuracy.
Demandforcleanerandsafervehiclesandrenewableenergyisincreasingsubstantiallyinthe

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BRICSparalleltothegrowthofmiddleclass,sotherewillbemoreneedforsemiconductors,
especiallyforpowerchips.ItisalreadyplannedtosetupasecondcleanroominMalaysiaso
settingupmorecleanroomsorfacilitiesinthesecountrieswouldhelpInfineontoprovidetheir
technologyandcostleaderservicesfasterthanthecompetitors.Cheaperworkforceandproduction
intheemergingmarketswouldcreateanadvantagewhensettingupthenewcleanrooms.
SecondlysincetheindustryisverysensitivetonewinnovationsmoreinvestmentintheR&D
projectsiskeytostayastheleaderproviderofnewesttechnology.Itismentionedthatlawsuits
regardingintellectualpropertyhavebeenanissueinthesector.Therefore,anotherstepwouldbe
tohavelicensestoprotecttheirdevelopedtechnologybyavoidingpossiblelitigations.Thiswould
strengthenthepositioninexistingmarketsandprovideimportantadvantageinthenewmarkets.
Lastlytheindustryitselfisknownforlongleadtimesfornewtechnologyandmanufacturing
capacity,intenserivalryandfastpacedinnovation.Hencepursuingstrategicacquisition
possibilitiescouldgiveInfineonacompetitiveadvantageandstrengthenthepositioninthefuture.
Basedon2011data,Infineonhasbeenperformingwellwithits4bnrecordrevenue,6bn
marketcapitalizationand2.4bncash.Accordingtotherevenuesitwasrankedas2ndinEurope
and12thintheworld.Itholdsthelargestmarketshareinglobalpowerchipsmarketwith11.2%in
2010.IntheforeseeablefutureInfineonhasastrongoperationalstandpointconsideringthatithas
size,technologyandcostleadershipcomparedtotherivals.Additionallyithadimproveditscash
conversioncycle(CCC)[1],whichdecreasedfrom98daysin2009to7daysin2011.Thisimplies
thatInfineonisdoinggoodfromanoperationalstandpoint.ToimproveoperationsInfineongot
ridofitsriskiestunit,whichwasmorevolatilethanothers.Eventhoughithelpedthemtobesafer
andmaintainlongtermcustomerrelationshipswithsetpricesitwasntenoughtogetridofhighly
cyclicalpatternandrisksoftechnology,competitionandexchangerates.
Question2.CapitalStructure
Asaconsequenceoftheremarkableperformanceoverthepastyears,Infineonhasgenerated
enoughinternalresourcestofinanceitsinvestmentsneedsandsecureitsfutureliquiditywithout
externalsources.Theseresultsexplainwhythecompanydecreaseditsdebt,builtasignificantcash
positionandpaiddividendsforfirsttime.Debtdecreaseshavebeenfollowedbybuybacks,
dividendspaymentandrepurchasesofconvertiblebonds.ForFY2010thedividendpayoutratio
was16.5%andtotalpayoutratiowas47%.ThesetransactionshadhadanimpactonInfineons
capitalstructure,whichoverthepast4yearsshowedadefinedtrend.Debtisdecreasingand

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equityisgrowing.ForFY2011theportionofequityovertotalcapitalemployedwas95%compared
to72%in2008.(Appendix2).ThiscapitalstructurehadledtoaWACCof1012%[2].
Infineonsmainsourcesandusesoffunds:Sources:For2011themostimportantsourcewas
thecompanysnetincome,whichaccountedfor1.119million.Additionally,490millionEuroswere
generatedbythesaleofassets.Basedonthecase,thissaleprobablycorrespondstothedivestiture
ofInfineonswirelessunit.For2010,thenetincomecontinuedtobethemainsource(659
million)alongwithotherdivestitureofassets,whichgenerated282million.Uses:In2011the
mostsignificantuseoffundswastheproperty,plantandequipmentinvestment(+505million).In
2010,thepaymentofliabilitiesof388millionrepresentedthemainuse.However,theseusesare
lowerthanthetotalincreaseincashreserves.ThisstrongcashpositionwillguaranteeInfineons
futureliquidityneedsanddecreaseunderinvestmentrisk.
Infineonssustainablegrowthrate:AccordingtoHiggins(1997)thesustainablegrowthrateis
thehighestgrowthacompanycankeepwiththesamecapitalstructure.Itisdeterminedbythe
returnonequityandtheplowbackratio.Thismodelhas4mainassumptions:thecompanysells
nonewequity,wantstomaintainitscapitalstructure,hasatargetdividendpolicyandgrowsas
rapidlyasmarketconditionspermit(Platt,Platt,M.B.,&Chen,1995).InInfineonscasethereis
notenoughinformationtoconfirmtheseassumptions.First,thecapitalstructurehaschanged
everyyearanditmightkeepchanging.Second,ithasnotadefineddividendpolicysinceithas
onlydistributeddividendsonceandMr.BauersstatementsonlysuggestsInfineonwillstart
payingregulardividendsbutnotadditionalinformationisgiven.Third,Infineonsassetturnover
ratiohasincreasedconstantlyoverthepast4years.IfweassumethatInfineonscapitalstructure
for2011,theassetturnoverandgrossprofitwillremainconstantandthatthecompanywillkeepa
dividendpayoutratioof16.54%,wegetasustainablegrowthrateof15.37%(Appendix3).Thisrate
islowerthanthe2011assetgrowthrate(17.62%).IfInfineondidnthavedebtanddidntpayout
dividends,itcouldreinvestitsearningsandthesustainablegrowthwillbesimilartoitsasset
growthrate.
Infineonscurrentcapitalstructure:Itiswellknownthatcompanieswithhighfinancial
distresscostsshouldhavelessdebtandholdaconservativeapproach.InInfineonscasethese
distresscostsincludenotonlydistressrelatedtobeingunabletomeetfinancialcommitmentsbut
alsoinvestmentneeds.SinceInfineonisaknowledgebasedcompanythatoperatesinan
extremelycompetitiveindustry,itisvitaltobeabletocontinuewiththesignificantinvestmentsin

R&Dithaddoneinthepast.InFY2011,thecompanyslevelofR&DexpensesandtotalCAPEX
investmentwas11%and22%ofitsrevenuerespectively[3].TodosoInfineonisusingitsinternal
funds,whichexplainswhythecompanyisholdinghighlevelsofcash.Thispolicyallowsthefirm
todecreasetheriskofunderinvestment,whichwouldbethesameasthedefaultrisk.
Additionally,accordingtothepeckingordertheory,acompanyshouldusefirsttheinternalfunds
beforeraisingdebt,sinceitisapositivesignaltothemarketofitsgoodfinancialpositiondueto
healthycashflows.AnotherfactthatcanexplainInfineonscurrentcapitalstructureisthatby
havingalowdebtportionitwillbeeasiertoacquiredebtunderfavorabletermsduringcrisis.This
accesstofinancialresourcesiskeytoInfineonsinceitsmainassetsareintangiblethereforethey
arecompanydependentandcannotbehedgewithfinancialinstrumentsanddontmatch
companyscashflows.
...

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