Omnicom (A)

In February 2001 Omnicom Inc.'s CFO, Randall Weisenberger, restructured Omnicom's liabilities by replacing a plain-vanilla convertible bond with a Liquid Yield Option Note(LYON). Omnicom's LYON is a "No-No," a name that reflects the fact the bond sold for par (NO accretion) even though it pays a 0% coupon (NO coupon) in most scenarios. To entice investors to buy this security, the LYON contains a conversion feature whereby investors can convert their bonds into common equity under certain circumstances. In addition, the Omnicom LYON contains a "Copay" feature which reflects the fact that the interest rate payable to investors is contingent on Omnicom's stock price. The Copay feature is a central issue in the case, as it allows the corporation to treat the bonds under the Internal Revenue Service's Contingent Payment Debt Instrument (CPDI) rules. This effectively allows the corporation to take large interest expense tax deductions even though no cash coupons are paid. The tax shield exists only as long as the bonds remain outstanding. However, the Omnicom LYON is putable and callable annually. In the event that investors put the bonds back to the company, the tax shield will be extinguished. Part (A) of the case describes Omnicom's No-No and provides a rich example for exploring the economic rationale for including various provisions in bond indentures. Part (B) of the case describes a crisis facing Ominicom when rumors of fraud put the company at risk of facing $1.7 billion in put obligations. A DVD of the CFO discussing Omnicom's crisis with Kellogg students is also available.