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Technology Stocks : Wind River going up, up, up!
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To: the hube who wrote (1538)7/18/1997 10:16:00 AM
From: JB   of 10309
 
Why borrow money?

The company stated that the proceeds of the offering are for general corporate purposes, including working capital, and
potentially to acquire complementary businesses, products or technologies, real estate, related capital equipment and
enterprise software licenses.

It is contemplated that the notes will be convertible into shares of the company's common stock and will have a
five-year term. No other terms were disclosed.

Being a financial guy, my guess is that WIND is trying to accomplish several things with this bond offering. Just like a person out of college who applies for their
first credit card, WIND is establishing their own credit history. Any company that will grow into something big will have a combination of equity/ debt on the balance sheet. They will try to structure the balance sheet with the optimal cost of capital In fact it has been argued by PHD types that a company with a 100% debt structure is most optimal for free cash flow. (debt is deductible). In the real world 100% debt is impractical.

I do not think they will use the money to take over another company, at least not all cash. WIND would use stock for that purpose. An example is Cisco, they have been using their stock to acquire competing and complementary technology to maintain their market advantage. The downside to this method is EPS manipulation. When a company acquires another company for stock, by using the pooling of interest accounting method they can make their EPS look better than it really is if their P/E ratio is several times higher than the company they acquire. That is what happened to Medaphis. Eventually the quality of their EPS was diluted by all their acquisitions and when that tried up EPS crashed.

At WIND's rate of growth I think they are trying to get their infrastructure set. I would bet they will buy some real estate for future expansion as well as technology that will round out the product line. They are adding people like crazy and need somewhere to put them.

In the short run this debt will dilute EPS until it is put to productive use. I trust that management thinks that the opportunities are there to take 5% to 6% money (after tax cost of capital) and make a return in the 30% to 50% range. I will take that spread any day. I am sure the analyst at H&Q and Morgan Grenfell already have this figured out.

The real question is what inane comments will come from Mark B.
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