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________________________________________________________________________________________________________________ This note was prepared by Professor Malcolm Baker for the sole purpose of aiding classroom instructors in the use of "Corning: Convertible Preferred Stock," HBS No. 206-018. It provides analysis and questions that are intended to present alternative approaches to deepening students' comprehension of business issues and energizing classroom discussion. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2006 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means-electronic, mechanical, photocopying, recording, or otherwise-without the permission of Harvard Business School.
Corning: Convertible Preferred Stock
Founded in 1851, Corning Incorporated (Corning) had spent much of its history focused on the manufacture of glass products. By the late 1990s, Corning looked more like an emerging, high technology company than a 150-year-old manufacturer. The passage of the Telecommunications Act of 1996 and the growth - and anticipated future growth - of Internet traffic created considerable demand for Corning's fiber optic telecommunications products. Almost two-thirds of its sales came from this segment. Like many other telecom suppliers, Corning's stock price rose rapidly over this period, increasing 12 times between late 1998 and the fall of 2000. The rising stock price facilitated internal growth and growth by acquisition. When the demand for its products fell sharply in 2001, so did Corning's stock price, giving up all of its gains from the late 1990s and then some.
With Corning's survival in question, James Houghton returned to the post of CEO in 2002. A $5 billion charge to earnings in 2001 meant that the company was in danger of violating its debt-to- assets covenant. Moreover, cash flow turned negative in the first half of 2002. Needing a new infusion of equity capital, CFO James Flaws and Houghton were considering issuing $500 million of mandatory convertible preferred stock. The new security offered a dividend of 7% for three years, after which the security would be converted into equity at a predetermined rate. An unusual feature of the security was that the dividend was guaranteed with a dedicated...