Case Review: Linear Technology Essay Example
Case Review: Linear Technology Essay Example

Case Review: Linear Technology Essay Example

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  • Pages: 11 (2861 words)
  • Published: August 22, 2017
  • Type: Case Study
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Linear Technology was founded in 1981 and is based in Silicon Valley.

The company focused on the design, manufacturing, and selling of parallel integrated circuits. Linear had a diverse client base, with 33% of its business coming from the communications sector, 27% from computers, and 6% from automotive industries.

Linear operated with a modest CAPEX, enjoying low obsolescence of equipment and techniques. With a focus on the parallel section of the IC sector, they aimed to hire and retain talented individuals who were skilled in out-of-the-box thinking and developing advanced products, in order to remain competitive. They achieved an IPO in 1986 and derived 34% of their income from various other applications.

This, along with their minimal R&D expenses, contributed to higher profit margins compared to other digital IC products. Linear's performance on the Philadelphia Stock Exchange Semicondu


ctor Index (SOX) also demonstrated their success, ranking 7th. In 2001, when global technology spending was at its peak, Linear achieved its highest level of profitability.

Despite experiencing its lowest gross revenues the following year, Linear was able to maintain positive cash flows and strong profit margins. This was achieved through various methods, including cost cutting facilitated by their flexible cost structure. By the third quarter of 2003, Linear was successfully recovering from the recession with robust financials.

Despite political turmoil worldwide, the top line gross revenues and net income of the tech industry remained lower than their peak in 2001. Year over year growth in 2003 was positive compared to 2002, but the company did not see a clear path to reaching the levels achieved in 2001.

Simultaneously, Linear did not want to establish borders in new markets such as Asia. By 1992,

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Linear's leadership felt confident in their ability to maintain positive cash flows for the future, as they had achieved this since their initial public offering. As a result, they started distributing dividends of $0.00625 per share, with a payout ratio of 15%.

In 2002, LLTC continued to publish dividends despite having a higher payout ratio of 27.24%. This decision was made to avoid losing favor with investors, particularly common funds and EU investors who highly preferred stocks that paid dividends.

Linear started buying back portions of their stock when interest rates or market rating were low. They were hesitant to distribute all or more of their cash in dividends, as it could indicate a lack of growth potential. Notably, many institutional investors, including Janus Capital, held Linear stock.

Linear aimed to offer their investors reassurance regarding their financial status, highlighting a substantial hard currency balance of $1.5 billion and no existing debt. However, they faced the challenge of determining the most effective way to utilize this cash. Among their options were investing in new projects.

2) Paying out through dividends and/or redemptions. And 3) Saving it for future investments in innovation and diversification. In this paragraph, we will analyze three different approaches in deciding Linear's payout for Q3.

Linear's payout for Q3.

Approach - Increasing Dividend by One Cent

The analysis below assumes that the decision to buy back 165.7 million in stock will not be adjusted. The decision to be made is whether to increase our dividend by one cent per share.

It would be prudent for the board to approve either the full 25% dividend of $0.05 per share or not raise dividends in Q3, based on

Linear's historical trends.

The dividend policy established in Q2 will continue, with the payout ratio remaining at 27.48% of Net Income and the dividend payment per share staying at $0.05.

By increasing the dividend by one cent per share, the year-to-date payout ratio would experience a slight rise to around 29.31% for the three quarters (Exhibit 1). Currently, the payout stands at $0.

The dividend for the third quarter is $0.06 per share, resulting in a total payout of $18.7 million. However, our institutional investors perceive this amount as insignificant due to our significant foreign currency holdings. Increasing the dividend by one cent will raise the total offering to 215.

The company will return 70 million dollars to investors through dividends and stock redemptions. Paying the additional 1 cent would still be in line with our long-term dividend plan, but it may not meet the requests of some major investors.

Available Cash to Distribute

It is important to mention that the company will distribute more to shareholders in the form of stock redemptions and dividends than is available through its operations. This overpayment is true if the company maintains the dividend at its current level.

05. or increases it to. 06. The house has generated a sum of 207.

The commitment to increase the dividend by one cent would require paying out a sum of 215.7 million, resulting in 5 million FCFE dollars.

05 dividend reduces this figure by merely three million.

Cash Needs and Agency issues

Excess hard currency to turn to any unanticipated demands will readily be available by following the conservative one-cent addition program. Increasing the dividend to. 06 includes keeping on to about 100

per centum of a really big hard currency place and hence provides small force per unit area to place such future hard currency demands.


Linear’s gross revenues are swerving upward since the 2002 diminution, but the immediate hereafter is still non clear.

Accepting this conservative program aligns with their strategy of consistently communicating a message of financial security and stability to investors, while also offering solutions for the current disruptive times. It is crucial to consider alternative ways of utilizing this cash, including improving employee incentives, training, and workplace enhancements.

Other Factors to Take into Account

If they implement the conservative program without addressing Janus' concerns and those of other like-minded investors, it could imply a lack of full confidence in asserting that they have resolved their recent issues.

To address investor concerns regarding this program, it is important to communicate a carefully crafted message as quickly as possible. In addition, other strategies, such as redeeming portions previously and offering special dividends, should be considered to address the concerns of Janus and other companies that share their stance on Linear's current cash position. These issues will be discussed further in Approach 2.3 outlined in the following sections.

Approach – 2: Payout all of Linear Technology’s Cash 1

In this subdivision, we discuss an alternative payout plan in which Linear Technology gives back all of its $1.5 billion to its stockholders by either:

(a) Paying a special dividend of $5.

01 per portion. or ( B ) Buy backing about 50 million portions.

Particular Dividend of $ 5. 01 per portion

One end of the particular dividend is to demonstrate investors that Linear is in a favorable position and to purchase

portions from Linear Technology carries less risk compared to purchasing portions from technology companies. Additionally, it indicates to the market that Linear is committed to distributing its wealth with its stockholders.

With these increased overall payouts, Linear Technology has the ability to attract investors seeking specific income goals.

Share Value

When dividends are announced, there will be an increase in demand for shares.

If investors are informed about a certain dividend payment, the share price will rise by that exact amount (Law of One Price). In this situation, the present share price is $30.87 and the announced dividend stands at $5.01; thus, the anticipated post-dividend share price will surge to $35.


1 Exhibit 4 displays calculations for Numberss mentioned in this section

Firm Value

The entire amount of dividend is not added to the stock price at once. It depends on the time until the dividend is paid. If there is still a certain period of time until the dividend is paid.

The net present value of the dividend will simply be added to the portion monetary value. It can also be said that as the payment of the dividend approaches, the total dividend payment amount is added to the normal portion monetary value. This also results in an increase in the market value of equity. On the ex-dividend day, the portion monetary value will decrease below the level of the pre-announcement day because the dividend, which drove the demand to rise, has been paid.

The additional amount of

$5.01 is no longer included in the portion value. The stockholder is paid the dividend as part of the equity. Thus, the dividend policy does not significantly impact the firm's value.

Payout Ratio


In this scenario, the payout ratio becomes a surprisingly high 945% (Exhibit-4), which is significantly higher than its counterparts (Exhibit 2).


By deploying capital through an increased dividend rather than partial redemption, the company is signaling that Linear's stock is reasonably valued in the market. However, if Linear increases its dividend excessively, such as distributing all its available cash as dividends, it may signal to the market that the company's growth is slowing down and there are no new profitable projects for the company to invest in. Nevertheless, this can help convey a positive signal that the company is confident in generating sufficient cash flows for its operational and investing needs. Since Linear Technology's profits this quarter were significantly lower than that of the previous year, implementing a large special dividend may help investors regain trust in the company.

Agency Jobs

One strategy to lower agency costs is by increasing dividend payments. When managers have a substantial amount of cash available, they exert greater control over the company's capital. By distributing dividends to investors, there is enhanced oversight of the capital and it becomes less attractive for managers to allocate funds towards projects that would reduce shareholder benefits.

Tax Clientele

With its significant dividend, the company may attract more European and/or mutual fund investors. However, this move may also displease Institutional investors who do not have tax privileges. Additionally, announcing a dividend may incentivize older and financially

disadvantaged investors to purchase more of Linear's stock. ( B )

Share Redemption

Share Price and Outstanding Shares

Linear has the option to repurchase 50 shares.

By passing all of its hard currency, 7 (16.23% of common portions) million common portions are obtained. When this is done, the number of outstanding portions will be 261.7 million.

Historically, companies have experienced an increase in stock value after making a portion repurchase announcement, as it can enhance their earnings per share (EPS). In this specific case, the EPS rises to $0.65 (Exhibit-4).


By allocating all of its capital towards portion repurchases.

Direction indicating the market that their stock is undervalued is possible. Linear has had positive cash flow over the years and can use its $1.5 billion net cash to bridge the valuation gap by accelerating share redemptions. In summary, if the company proceeds with a significant stock redemption or special dividend.

The company's stock value may decrease if it signals to investors that it is no longer growing. Therefore, it is risky to pay out all of Linear Technology's cash, as it suggests that the company does not have a clear vision for the future.

Therefore, in this section we explore a less aggressive approach that falls between retaining their cash balance (Approach 1) and paying out all of their cash (Approach 2). In evaluating this approach, we have assumed that Linear will need to maintain its quarterly dividend at $0.05 and that the remaining cash after accounting for this dividend can be used for either a special dividend or a partial redemption. The following section analyzes the impact of paying out 50% of the remaining

cash reserves either as a special dividend of $2.

51 or by purchasing 25.35 million shares.

EPS and Share Price

If we were to buy back shares using 50% of the cash, the EPS will increase from 0.55 to 0.59, approaching the 2002 figures of 0.

According to Exhibit-3, the price/earnings ratio in 2003 was 56.53. Based on this ratio, we can estimate that the share price will increase to 33.65 with the increased earnings per share and including dividends.

If we were to pay out a specific dividend of $2.51 per share instead, the share price dividend could be estimated to be a nearly comparable $33.38 (Exhibit-5). EPS will be 0.55.

Q2 degrees (0.54) are very close.

Payout Ratio

The dividend payout ratio for this particular dividend is approximately 486.3% (Exhibit-4), which once again is much higher than Linear’s competitors (Exhibit-2). In comparison to a share redemption, the payout ratio remains consistent with previous quarters at 27.

5 % .

2 Exhibit 4 displays the calculations for Numberss presented in this section

Firm Value And Shareholder Wealth

Redemptions will help alleviate some of the dilution of the EPS resulting from options awarded to employees and directors as Linear's incentives for all employees include stock options. In contrast, dividends will help distribute the wealth more equally among all investors, while redemptions cause an uneven distribution as the shareholders who do not sell will experience a decrease in book value of the shares from $5.01 to $3.

23 (rough estimate based solely on currency assets - Exhibit 5. Tax Clientele With the new regulations requiring an equal tax rate of 15% for Capital

gains and OIC, there are no measurable advantages in choosing whether to distribute funds through a special dividend or redemptions. However, there may still be some benefits.

There may be psychological impacts to consider based on the preferences of the stockholders. For example, if a majority of the stockholders are older, they may prefer receiving dividends from the stock.


Linear's investors are accustomed to receiving dividends.

Having periodic redemptions and additional payouts of hard currency can increase Return on Equity (ROE) and reduce shareholders' risk premium. Given the current low interest rates on hard currency (as of 2003), it seems beneficial for the stockholders to distribute at least a portion of the hard currency balance. However, excessive payouts may suggest a lack of growth potential for the company, but they do communicate the company's intention to share its wealth.

This message of being a “cash-cow” can be better understood as a company hoarding its wealth.


A quick look at Maxim's financials reveals that they have begun sharing their cash with their shareholders. In 2002, their cash returned was over 200% of their FCFE (Exhibit-2), and their cash reserves decreased by 455 million. It seems that they used this cash for redemptions in order to concentrate their wealth among a smaller group of shareholders. At the same time, they managed to significantly increase their top line numbers compared to 2000.

By distributing 50% of their hard currency to their shareholders, Linear will be able to align itself with its nearest competitor.

Issues of agency and other aspects to consider

One key point to note is that dividends do not necessarily need to be maintained, similar to the concept of buybacks in this


Redemptions have beneficial effects on EPS and prevent dilution, making them potentially more favorable than dividends. Moreover, when it comes to bureau issues, keeping only 50% of the cash position may not offer enough incentive to strive for positive NPV projects.

Using 100% of the hard currency will be more effective than keeping most of it, as in Approach 1.

Our Recommendation for Linear

Our recommendation for Linear is to maintain the current dividend policy - paying a quarterly dividend of $0.05 per share, and also repurchasing 25 shares.

35 million portions are being utilized, amounting to half the hard currency balance. It is recommended to maintain dividends at levels similar to previous quarters in 2003 to prevent unfavorable market reactions. Meanwhile, the company is focusing on devising a strategy to boost top line revenues and profits to reach or exceed the levels achieved in 2000-2001. Completely canceling the dividend or reducing it compared to the previous quarter is not feasible, as it would be viewed very negatively by the market.

Historically, Linear has never increased dividends in Q3 compared to Q2. Therefore, it is advisable to maintain a dividend of 5 cents per share for Q3. Furthermore, Exhibit-2 demonstrates that Linear already pays higher dividends than its competitors, including their main rival Maxim.

Paying out all of the hard currency may leave the company without enough liquidity. The semiconductor industry, which requires constant innovation and opportunities for new ventures like entering the Asian market, makes it safe to assume that the company should keep some cash reserves for uncertainties. Linear is aware of the need to expand their business and find ways to increase revenue, so keeping some cash

and supplementing it with capital from debt and/or equity markets is worth considering.

The recommendation is to use only 50% of the cash balance for purchasing shares, which serves as the foundation for our conclusion. Moreover, through share buybacks, Linear can effectively communicate to the market that the stock is undervalued. Simultaneously, retaining a portion of the cash balance is advised.

Additionally, these also indicate the existence of lucrative positive NPV projects for Linear to pursue. Taking into account the characteristics of the industry and the plateau in top line revenues, Linear will need to consider innovation and new markets, both of which have the potential to bring about significant growth.

In regards to this, we firmly believe that the EPS increase resulting from a share buyback is currently more advantageous for Linear than the impact of distributing shareholder wealth through special dividends.

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