The Lesson Of GTAT: Raise Money When You Can
You know the stuff of Greek tragedy. It features a hero who means well (isn’t it tiresome to hear people tell you that they mean well), achieves apparent greatness, then crashes and burns because of some mix of pride (hubris) and misjudgment (hamartia).
Consider Tom Gutierrez, the head of suddenly bankrupt GT Advanced Technologies (GTAT). Mr. Gutierrez—a brilliant engineer more focused on positioning his company than on the stock market’s reactions—decided two years ago to get GTAT away from a languishing solar business and into the potentially dynamic sapphire field. He knew he’d need capital, so he turned to the convertible bond market. On September 24, 2012, GTAT announced what eventually became a $220 million convertible financing. Just over a month later, the company announced it was laying off 25% of its workforce.
This came as a shock to convertible investors, who felt they’d been sandbagged. Mr. Gutierrez thought investors would appreciate his decisive action—and eventually, at least for a while, he was proven right. First, though, the stock collapsed to less than half its price at the time of the convertible issuance.
If this soured Mr. Gutierrez on raising money through convertibles, though, he got over it quickly enough. Just over a year later, in early December 2013, GTAT was back at the convertible trough, raising another $214 million. This was just after the company had agreed to borrow nearly $600 million from Apple to make the necessary expenditures so that it could supply Apple with sapphire for iPhone screens.
(AP Photo/Marcio Jose Sanchez)
Unfortunately, the Apple loan apparently came with a deadly catch. Apple could demand accelerated repayment whether GTAT was in position to do so or not. Convertible bonds sold to the public rarely, if ever, carry such a Damoclean sword.
When GTAT borrowed the money from Apple, it had a $1.2 billion market capitalization. Instead of raising nearly three-quarters of the funds from Apple, GTAT might have structured a bigger convertible deal along with new equity—say $400 million each of equity and convertibles. It would have been a huge nut, and it would have knocked the stock down at least briefly, but there was a great story to tell. I think it could have gotten done. One way might have been to do several flavors of convertible—a shorter dated bond, a longer bond, a mandatory convertible preferred. Again, enough new equity to support the complex (and for hedge funds to borrow while buying the convertibles) would have been essential.
GTAT is, from what I understand, far from the first company to be romanced and then rejected by Apple. Perhaps Mr. Gutierrez felt the Apple deal was the best he could do—and it would have been a good deal if everything went perfectly. Sadly, GTAT apparently could not deliver what Apple wanted—either in cost, quality, quantity, reliability, or all of the above. By putting Apple in charge of both its assets and its liabilities, GTAT left itself open to this outcome.
In a perfect world, I prefer convertible deals that are relatively small compared with a company’s market capitalization—ideally less than 20%. That would not have been possible here. But it would have been better than leaving everything in Apple’s hands.
Even so, GTAT missed a golden opportunity to defease its obligation to Apple. As recently as July—just a few months ago—the stock had taken up residence near $20 per share. There was ample opportunity there, with a market capitalization of about $2 billion, to raise several hundred million dollars or more through a mix of equity and convertible debt. GTAT could have stashed that cash aside just in case Apple started bullying. Instead, it became the latest in a long array of companies that have forgotten the first rule of corporate finance. Raise money when you can, not when you have to. Hopefully others are taking notice.
News 
Market Data 
Discover 
