The ‘Proverbial Win-Win’
The ‘Proverbial Win-Win’
Wendell Weeks and Jim Flaws discuss new agreements with Samsung
This week, Corning announced a series of agreements to strengthen the company’s strategic and financial position by building upon its 40-year relationship with Samsung.
This was a pretty complex announcement. Let’s cut to the chase. How are these agreements strategic for Corning?
Wendell: Corning is going to take 100% control of our joint venture Samsung Corning Precision Materials (SCP). This means we will now control all of our global fusion assets and we will deal directly with all of our customers.
This is strategic for a number of reasons. It simplifies our go-to-market strategy. We will now be able to serve each of our customers directly as Corning. It also lowers our overall cost and gives us access to some underutilized fusion capacity, which should lower our future capital expenditures.
At the same time, we’re maintaining our strong relationship with Samsung. First, we’ve signed a new ten-year long-term supply agreement with Samsung Display for their LCD needs through 2023. And second, we’re going to do a number of new joint technology collaborations to help us both develop new products.
What can we expect in terms of financial impact? And what does this news mean for shareholders?
Wendell: We expect to put the company in a much better financial position which, in turn, benefits our shareholders. Integrating SCP will immediately increase our revenue, net income, and cash balances, while creating a new source of long-term cash flow.
Jim: The numbers really tell the story. We’re going to get $1.2 billion dollars out of SCP before the transaction closes. Second, when we integrate SCP, we’re going to see $2 billion extra sales and about $350 million incremental net income. On top of that, we’re getting access to the cash flow every year from SCP, which adds approximately another $500 million per year, or $2 billion over the first four years. Lastly we’re putting all that cash to use and we’re offsetting the dilution from the preferred stock that we’re issuing by doing an incremental $2 billion share repurchase. So investors are going to see great results from this deal.
Why did you choose to finance the deal with convertible preferred stock?
Jim: Preferred stock actually had advantages for both partners in this transaction. For Corning, it meant we weren’t committing our cash to the deal and we’re actually de-risking it. For Samsung, they’re clearly excited by our new glass innovations and they wanted to get more ownership in the “broader Corning.” So it really was that proverbial “win-win” for both partners.
The LCD industry is maturing, and you’ve had to navigate price declines and other challenges in the past couple of years. Are you worried that this deal could increase Corning’s vulnerability?
Jim: I think it actually lowers our vulnerability. We’ve known for a long time that the LCD business would mature. What we’re doing with this deal is actually making a mature business better. It’s going to be more profitable; we have the opportunity to get to the lowest cost manufacturing assets; we’re going to get increased cash flow and, as Wendell noted, it enables us to be more responsive to our customers.
But it’s important to remember that this is about more than just the LCD business. SCP today has a number of tanks that are idle. We’re going to be able to put any of our flat glass products into those. So for example, we can make Gorilla® Glass there, and they have very low-cost manufacturing platforms. We’re also going to be able to make some of our new products like glass for architectural and glass for automotive, and we’re essentially getting the capacity that is already sitting there idle. So this is about enhancing Corning overall, not just the LCD business.
How much opportunity do you think is out there for fusion?
Wendell: Between current applications and potential future applications, I think the opportunity is nearly limitless.
Today, we’re used to thinking of our global fusion assets as primarily serving our liquid crystal display business, our OLED technology initiative, and, of course, Gorilla Glass. But as we take a look at the fusion platform, we see the potential for some significant new innovations.
We see opportunities for engineered flat glass in areas like automotive, architectural, and appliance. You’ve also heard a lot of discussion around Willow™ Glass, which is a new, ultra-thin, flexible and conformable glass. And really, this is just scratching the surface.
Whenever anyone asks me what we plan to do with this glass, I urge them to review our
“A Day Made of Glass” video. That articulates a really sharp vision for the future of glass. And all of those are based on our unique fusion platform.
How does this investment by Samsung impact Corning’s independence?
Jim: Independence has always been – and remains one of Corning’s core values. We want the ability to work with all customers and we want the freedom to direct our research against opportunities that we think are important.
We’ve structured this deal such that Samsung has an economic interest in Corning, but not a management interest in Corning. First of all they get no board seat, they have limited voting rights, and no observation rights. Second of all, they’re limited to 9% effective ownership in Corning. So our independence remains intact. Nevertheless, we’ll still have this very strong relationship with Samsung as we develop technologies and new products.
So stakeholders should feel confident that nothing is changing in terms of Corning’s independence, our priorities, or our Values.
How are investors reacting?
Jim: The initial reaction has been very positive. We’ve had comments ranging from “This is the best deal I’ve ever seen” to people thinking we really did a great job negotiating with Samsung. I often have to remind them it was a win for Samsung also. But they’re quite pleased by the financials, they’re quite pleased by the cash flow, and especially pleased by us doing the share repurchase to offset dilution.
Forty-year collaborations are pretty rare in the business world. How have Corning and Samsung made it work?
Wendell: No question, forty-year collaborations are rare. People frequently ask what the key to our success is. I think it comes down to several factors: First, you must have a shared vision of what you think is possible and the role you can play in making that happen. Second, you need complementary capabilities. In other words, each partner needs to bring something to the table. Third, you need to make balanced contributions. If one partner is doing more than the other, it’s going to create resentment and frustration. Next, you need the commitment and engagement of senior leadership – not just at the time of the deal, but throughout the relationship. And finally, you need to evolve as business priorities or market realities change.
There are also factors that are harder to quantify, but absolutely vital. And those are personal trust and professional respect. We’ve been fortunate to have that with Samsung.