Super Micro Computer Raises $3.75 Billion in a 7% Mandatory Convertible Preferred Offering

What Super Micro sold

Super Micro Computer, Inc., the San Jose company that assembles servers and storage systems for artificial-intelligence and data-center customers, told investors on June 15 that it had completed a large capital raise. In an underwriting agreement dated June 10 with J.P. Morgan and Goldman Sachs as lead banks, the company agreed to sell 75 million depositary shares. Each depositary share represents a 1/20th interest in a share of a new 7.00% Series A Mandatory Convertible Preferred Stock that carries a $1,000 liquidation preference, so each depositary share carries a $50 preference. At $50 a share the sale raised about $3.75 billion, and the banks hold a 30-day option to buy up to 11.25 million more depositary shares, which would push the total to roughly $4.31 billion. The offering closed on June 15.

Why a mandatory convertible matters

A mandatory convertible preferred is a hybrid security. It pays a fixed dividend, here 7.00% a year, and unlike ordinary convertible debt it must turn into common stock on a scheduled date rather than being repaid in cash. For a fast-growing, capital-hungry hardware maker that prefers not to add ordinary debt, the structure raises equity-like money up front while pushing most of the share dilution a few years out. The 7% dividend is the price of that delay. Creating the new senior class also triggered the other items in the filing, because Super Micro recorded a material change to the rights of existing shareholders and filed an amended charter, the Certificate of Designations that defines the preferred. The depositary shares now trade on Nasdaq under the symbol SMCIP, separate from the common stock.

What to watch

1. The conversion terms. The coming prospectus and charter exhibits set the mandatory conversion date and the minimum and maximum conversion rates, which together fix how many common shares the preferred becomes and how much existing holders are diluted.

2. The cost of the dividend. A 7.00% annual payout on a roughly $3.75 billion preferred is about $260 million a year, a fixed charge that ranks ahead of the common stock and weighs on Super Micro’s cash flow until conversion.

3. The over-allotment. Whether the banks exercise their 30-day option to buy the extra 11.25 million depositary shares is an early read on demand, and it decides whether the final raise is $3.75 billion or closer to $4.31 billion.