Professional networker LinkedIn (NYSE:LNKD.DL) has just announced that it's raising cash through a convertible note offering. Specifically, the company is looking to raise $1.15 billion in funds to add to its coffers. On the last conference call, management noted that the balance sheet "remains strong" with $2.3 billion in cash and marketable securities.
Does LinkedIn really need the cash or does it just want more?
Details of the offering
The offering will be a private placement to qualified institutional buyers, and as such won't be open to public credit investors. The aggregate principal amount will be $1.15 billion and purchasers will have a 13-day option to buy upwards of an additional $172.5 million, and the notes will be due in 2019.
These notes will be unsecured debt, but convertible to cash or shares of LinkedIn stock. All other pertinent details, such as conversion price and interest rate, will be determined when the offering is priced at a later time. Convertible securities have potential dilutive effects, which may be why shares are down 3% Wednesday.
At the same time, LinkedIn plans to enter various hedges specifically to mitigate the possible dilution effects. The company may also enter privately negotiated warrant transactions with its hedge counterparties, which have their own potential dilutive effects.
LinkedIn says it will use the net proceeds of the offering to cover the cost of the hedges as well as for general corporate purposes.
What it means for investors
While the offering sounds a bit convoluted, since LinkedIn is offering convertible notes and then hedging the associated dilution risk, there are certain benefits of issuing convertible notes as opposed to regular debt. Convertible notes typically carry lower interest rates, saving the company on interest expense.
Of course, in exchange for this lower rate is the option for bondholders to convert their holdings to stock for potential equity upside (and dilution to existing shareholders). Overall, this offering is a way to cost-effectively raise cash while taking advantage of the recent share price recovery.
Even as LinkedIn's balance sheet is indeed strong, the company has embarked upon a three-year data center strategy to build self-managed facilities. That's an expensive infrastructure initiative that will run through 2016, but the end result will be substantial savings in operating expenses, upwards of 50% per data center.
Capital expenditures have indeed been rising precipitously, which has been holding back free cash flow to some extent.
Still, those investments will definitely pay off in the long run and this offering will inevitably help fund these infrastructure investments in one way or another.
Evan Niu, CFA owns shares of LinkedIn. Evan Niu, CFA has the following options: long January 2016 $150 calls on LinkedIn, short January 2016 $200 calls on LinkedIn, long January 2016 $125 puts on LinkedIn, and short January 2016 $140 puts on LinkedIn. The Motley Fool recommends LinkedIn. The Motley Fool owns shares of LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.