Symantec is not only a software company but buys and sells companies to keep the market leader position and expand its business. This report is about how Symc was financing its activity with issued convertible bonds.

1. Symantec Corporation
Convertible Notes with Call Spread
Case Study Report
Attila Németh
2013 1

2. The Symantec case
• Symantec is the market leader on software market.
• Technology industry is a fast changing market – products life cycle is short,
new products and new demands occur, as a matter of fact, continually.
• I did deeper research about the company (I examined the sales, operating
profit, net income, leverage (chart 1 is incomplete in my case study, the
leverage diagramm is missing) and the stock price for a longer period,
• and tried to find out the motivation behind the transactions.
• I seek for this specific transaction and realized this is a real transaction
which was gripped my interest more.
• I read the annul report of Symantec - 2012 (there are a couple of cititions
in my case report).
• I found and read the purchase agreement of the convertible (June 19,
2006), and the offer by Simpson Tacher.
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3. The motivation of Symantec
• Symantec is not only a software company but merges, buys
and sells companies to keep the market leader position and
expand its market.
• This activity – mostly the aquisitions - are needed financing.
• The company has high volatility on stocks, as usually in the
software industry (historical 35,9%, implied –for 2 years-
34,3%).
• The average Equity/Debt ratio in software sector is around
50%.
• I supposed Symantec wants to levarage its E/D ratio, because
now it it above 70%, and needs low cost cash to continue the
aquisitions.
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4. The motivation of Symantec
The options are:
– Bank loan from the market – SYMC has no credit rating at that
time- high interest rate .
– Issue bonds or stocks – who would buy them, and for how
much? - and risk of dilution.
– Issue convertible - could be cheaper than the bank loan, but
there is risk of at what price SYMC would sell the notes and in 6
years the investors ask for the money back instead of convert the
bonds if the stock price would be under the convertible strike
price, and premium coupon should pay higher interest than SYMC
wanted to – the corporate 5 years bonds yield was 7,6%.
– Issue convertible with other instruments – This is what SYMC did.
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5. The transactions
1. SYMC issued converible $2,1 Billion (exp. 2011, 2013 average in 6
years), notes payed coupon semiannualy (annual interest is 0,75%,
and 1% average 0,9%) - and $1000 could be convert to 52 stocks upto
the expiry - it means on $19,12 / stock (converting before maturity -
trigger price was $19,12 X 1,3= $24, 86). The number of the notes
were 110 million.
2. Bought 110 million call options with a $19,12 strike for the same
expiry than the convertible and paid $592 million to the Bank .
3. Sell 110 million call options with a $27,3 strike for the same expiry,
and got paid $326 million by the Bank.
 At that time the current stock price was $15,63.
 This is the situation when the possible shareholders (noteholders at that time) get
a promise for $19,12 stock price and some premium and they see SYMC also trust
in the increasing stock price, in addition with the short call reduce the risk of the
dilution.
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6. Summary of the transactions
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Participants Position Amounts Payoff Comment
SYMC
management
issue convertible get $2,1 billion
must give 110 million
stocks and pays
premium or pay back
$2,1 billion
pay premium 0,9%
annual
Long call $19,12 pay $592 million
$ 266 million cost
call spread $19,12-
$27,3Short call $27,3 get $ 326 million
Bank
Short call $19,12 get $ 592 million
$ 266 million income
This is for the risk of
the bank , but the
bank has to hold 110
million SYMC stocks
which creates cost
Long call $27,3 pay $326 million
Noteholders -
Investors
buy convertible pay $2,1 billion
Possible to get 110
million SYMC stocks
or get back $2,1
billion and the
premium
get premium 0,9%
annual
The expiration date the same in every positions

7. Scenario #1
The stock price is under $ 19,12:
The noteholders do not convert the bonds to stocks, and get
back their investement (fund).
SYMC had paid the cost of the call spread ($266 million) to the
Bank, and the coupon premium to the noteholders, and the
fund what the investors have paid 6 years before. SYMC does
not excercise the long call and obviously the short and try to
inform the market on the most positive ways.
The Bank is in the money if the spot price is above $15,63. The
proceeds of the Bank is $266 million (minus the cost), and
immediately tries to sell the stocks on spot price.
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8. Scenario #2
The stock price is above $27,3:
The noteholders convert the bonds to stock on $19,12 and they would
be happy, and probably they sell the stock on spot price
immediately.
SYMC excercises its call on $19,12 and sell the stocks to the Bank on
$27,3 and issues new stocks and gives these (110 million stocks) to
the noteholders (virtually on $19,12 but from the wievpoint of
SYMC on $27,3), but it is perfect to the company, because the stock
price is very high and the demand for SYMC’s stocks would be
increasing, and Symantec easier can obtain money (credit).
The Bank tries to sell the stock immediately at the spot price (which is
higher, than $27,3).
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9. Scenario #3
The spot price at the expiry date is significantly higher than $19, 12 but lower
than $27,3:
The noteholders convert the bonds on $19,12 and likely try to sell it immediately.
SYMC excercises its long call on $19,12 and gives these stoks to the noteholders
(on $19,12), and issues new stocks and uses the short call and sells the stocks
to the Bank on $27,3. This is what Symantec invented. As my calculation
Symantec’s proceeds maximum $4,5 / share ($ 8,2/ share minus the cost of
the call spread/stock and the coupon premium/stock and the paid devident
meanwhile to the shareholders (but I have no information about the divident),
and the stock price is fairly high, so there is lower risk of the dilution.
The Bank is waiting for the increase of the stock price and try to sell the stocks
when the spot price is above $27,3, or if they have some reserve from the call
spread income ($266 million) sells the stocks a bit higher than the break even
point.
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10. Questions
1. Assuming conversion can only occur at the option’s expiry (expiration date),
analyse the cost and the payoff of the call spread from the viewpoint of
Symantec.
– „The payoff of the call spread from the viewpoint of SYMC:
Under $ 19,12 is the cost of the call spread and the premium has paid to the
noteholders.
Between $19,12 and $27,3: when the spot price is $21,5, the payoff could be
$0/stocks (SYMC earns $2,4/shareX110 million shares=$264 million and the call
spread had cost $264 million.) The full cost, with the bonds premium is $383
million, which is around $3,5/share. When the spot price is around $22,5 - this is
the break even point – the payoff is $0. The maximum payoff is $ 4,5/stock ($ 4,5X
110 million=$495 million) when the spot price is $27,3. (see on next slide)
Above $27,3 the same as when the stock price is $27,3.
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11. Questions
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payoff$/share
Payoff SYMC
payoff/share
payoff with call
spread costs
without
interest/share
payoff with call
spred cost and
interest/share

12. Questions
2. How should the $19.12 strike options purchased by Symantec
be priced?
I don’t really understood the question. Usually the Bank used to
price the option according to the Black – Shcoles modell. To
be honest I had no time to calculate this, but I know every
data were available: (volatility, strike price, spot price, yield,
time to expiry).
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13. Questions
3. Should Symantec issue convertible notes?
As Symantec obtained cash around 3% annual interest
in 2006. Yes, I assume that was a good decision from
the board.
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14. Questions
4. Why would Symantec not directly issue notes with a
conversion price of $27?
The than-current spot price is $15,63, and if Symantec only issue
a convertible on $27 should have offered a high premium (I
suppose higher than 7,6% annual) if even anyone would buy
the notes, and if the spot price is under $27 at the expiry the
noteholders would not convert the bonds. In this case
Symantec’s costs are higher, and the chance, SYMC have to
pay back the money to the investors more likely. From the
market point of view it seems Symantec is in the trouble and
urgently needs money.
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15. Summary
• I’m convinced Symantec chose the right decision
when isseued convertible notes with call spread to
get a low cost cash to continue the aquisitions and
retained its market leader position.
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16. Thank you for your attention!
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