KLA-Tencor's Leverage Decision: Cashing in the Chips Available to Purchase

In this case, students will assume the role of a fictional hedge fund analyst, Iván Champeau, who is conducting a pro forma financial analysis of KLA-Tencor (NASDAQ: KLAC), a publicly traded conglomerate in the semiconductor capital equipment industry with a focus on the process-control segment. The case takes place in the summer of 2014, immediately after the June 30 end of KLAC's fiscal year. Champeau feels that KLAC management has been too conservative in its capital structure management and could increase the firm's value by leveraging the company with more debt and using the proceeds to conduct a large share-buyback program. In the case's decision point, students must choose among four options regarding how much debt to recommend that the company issue. The case's flexibility allows it to be taught as an introduction or a more advanced and nuanced approach to the concept of capital structure management using debt's tax shield, counterbalanced by the potential costs of financial distress brought about by taking on more leverage.