Analysis

posted on 05 June 2008 10:26

NetApp is looking to raise over a billion dollars of cash.

It plans to sell $1.1 billion of convertible senior notes, due to mature in 2013, with a potential $165 million in additional notes to cover any over-allotments.

The notes will be convertible, subject to certain conditions, into cash up to the principal amount of the notes and, with respect to any excess conversion value, into shares of NetApp’s common stock. The interest rate, conversion rate, offering price and other terms are to be determined by negotiations between NetApp and the initial purchasers.

NetApp states: "NetApp expects to use (i) approximately $273.6 million of the net proceeds of the offering to repurchase shares of its common stock ..., (ii) a portion of the net proceeds for the cost of the convertible note hedge transactions ... and (iii) any remaining net proceeds for general corporate purposes, including capital expenditures, possible future stock repurchases, working capital and potential acquisitions and strategic transactions."

That means NetApp might have around $500-750 million dollars to fund 'potential acquisitions and strategic transactions.'

What is a 'strategic transaction' if an acquisition is excluded from that phrase? Obviously it is a significantly large and costly transaction that would affect the company's annual net income and its share price but what is the nature of such a transaction?

Also, why is NetApp doing this, preparing the ground to be able to acquire or merge with other companies, or to go through an expensive strategic transaction of some sort? It surely must have a strategy or forecast that sees this as a possible future happening.

Some of the money might conceivably be a hedge against a potential negative outcome of the Sun legal conflict but if NetApp was preparing the ground for that surely talks with Sun would be ongoing as a way of reducing the negative impact.

Update.

NetApp has a billion dollars in cash but a lot of it is outsidethe USA and bring it into the US would incur a tax liability as this internal NetApp memo says: "At the close of the market today, NetApp issued a press release announcing our intention to raise approximately $1B in cash. I am sure many of you are asking why we would do that if we have more than $1B in cash on hand today. The answer is that most of our cash resides outside the U.S., while most of our cash needs are inside the U.S. If we transferred our non-U.S. cash into the U.S., we would incur a significant U.S. tax expense. We believe that the most effective way to increase the amount of cash available to us in the U.S. is to offer a corporate debt instrument called a convertible note."

The note was an attachment to an SEC filing.

^{[Chris Mellor.]}