Could someone explain to a market novice what the rationale would be for this? I thought buybacks were a way of delivering value back to existing shareholders, but why take on debt to do that?
Effective interest rate on the $6 billion in bonds is approx. 2.4%. The stocks dividend is 0.90 cents per share which equals a dividend yield of 4.6% .
Think of it as a small company where you own 94% of the company and a partner who has a 6% share of your company. You can take out a loan for $100k and pay 2.4% ($2,400 per year) to the bank. or keep paying him a dividend (his share of earnings) at $4,600 per year. Kind of a no-brainer in terms of immediate cash flow. Plus after 10 years when you've paid off the loan you now own 100% of your company.
When you think of it that way it's really a slam dunk for Intel.
For Intel, their cash flow for 2011 was approx. $20 billion so they can obviously afford to pay back the loan.
Plus, there are other tax advantages to taking on debt.
The company thinks that reducing the number of shares can be accomplished at a price that is low, and that the interest on the loan to reduce the shares won't lower EPS. The shareholders should be (nominally) happy, because they are getting an earning income stream that is going to be higher in the future.
Now as an aside: Corporations famously mistime buying back shares, and management is usually trying to feather their nest rather than deliver long term value, so they typically make poor decisions on buybacks.