November 10, 2008
Apple’s $25 Billion Conundrum
By Tom Ryan
While everybody else
seems to be scrambling to find credit, Apple had $24.5 billion in cash
at the end of its fourth quarter – up nearly 60 percent from last year
– with no debt. That’s led to wild proposals on what Apple could – or
should – do with the money.
The cash trove news came
as Apple delivered a whale of a quarter. Adjusted income – fully accounting
for iPhone sales in both periods
– vaulted 115 percent to $2.44 billion as sales jumped 48 percent to
$7.9 billion. While iPods and Macs are still selling
well, the iPhone – accounting for 39 percent
of revenue in the period – has become the company’s third leg of growth.
"If this isn’t
stunning, I don’t know what is," said CEO Steve Jobs of the results
on Apple’s conference call.
Regarding its $24.5 billion
cash hoard, Mr. Jobs said it "provides us tremendous stability and
the ability to invest our way through this downturn." During the last
downturn, the company "increased R&D investments and created some
of our best new products and businesses," including launching Apple
retail stores in 2001.
But Mr. Jobs added another
comment that fueled speculation that Apple may pursue acquisitions of companies
that have become vulnerable and cheap in the downturn. Said Apple’s founder, "This
downturn may also present some extraordinary opportunities for companies
that have the cash to take advantage of them."
Tech bloggers at wired.com and zdnet.com immediately
came up with a wide list
of easily-affordable candidates for Apple, including Sony, Yahoo, Sun Microsystems, Netflix,
Blockbuster, and TiVo, as well as manufacturers of graphic chips and flash
memory and some hot websites. But Apple also appears to have three other
options: launching a major share repurchase program, paying a substantial
dividend, or letting its cash hoard grow. Throughout its history, Apple
has primarily only reinvested.
According to Bernstein
Research, the money is earning about 1.55 percent in interest after taxes.
Moreover, Apple’s cash haul is growing at the rate of eight to $10 billion
a year. In a research note provided to Forbes magazine, analyst
Toni Sacconaghi, who is hoping for a major share repurchase, noted
the company could simply let its cash load pile up, but then the questions
of what to do with it would "likely only get louder."
Mr. Sacconaghi also believes there aren’t any large companies
that are complementary to Apple.
Mr. Jobs, however, seemed
to brush off any stock buyback plan.
"I think cash is
already king and it may get more so that way, so we are very comfortable
with our cash position in the bank and it’s not burning a hole in our pocket," said
Mr. Jobs.
Asked about potential
acquisitions and his earlier comments, Mr. Jobs replied,
"I just meant exactly what I said, which is I think there’s going to
be some significant opportunities."
Discussion Question:
What should Apple do with its ample cash load? What factors determine
whether a company should make an acquisition? Is there a downside to
having so much cash on a balance sheet?
BrainTrust
Recent Discussions
Discussion Questions
Poll
I think you will see Apple become more aggressive on the M&A front, but you’re not likely to recognize the companies unless you’re in Silicon Valley. Apple’s recent acquisitions were PA Semi, Silicon Color, and Emagic. Apple tends to buy companies that bring specific IP, talent, or products to fit the overall strategy. Emagic, for example, made Logic, a key professional music production application, and discontinued the Windows version.
With all that cash, we may see Apple make bolder moves, but I expect they’ll be consistent with this philosophy: acquire companies that lock key technologies and markets into Apple hardware and the Apple “ecosystem” and/or keep Apple products well ahead of competitors. At some point we may see Apple make an acquisition to extend itself into a new marketplace, but one that is a logical extension of its existing business; maybe DVRs, media distribution, televisions, home automation/media serving, etc. A bolder move, but not unthinkable, would be to acquire a content publishing company, either music or movies, to capture some exclusive content for its iTunes ecosystem. Those companies’ revenues seem to volatile to fit the Apple model, however.
There are some ultra-rich, international preying sharks searching for innovative and cash rich companies such as Apple. It would be humiliating to have one bite off another American icon like when the Belgians captured Budweiser.
To lessen the likelihood of such a possible occurrence, Apple should use a goodly portion of their cash bounty for a larger R&D budget to invent the next generation of products that would keep Apple surging ahead of the pack…and be more valuable. Then, if there are extra bucks in their box, share them with the shareholders.
Cash is King, but R&D will make the registers ring!
If Apple wants to remain on top it should invest considerable amounts of its reserves into further R&D in order to stay ahead of the curve and to ensure continued dominance in phones and mp3 applications.
The iPhone is a very good phone but it is not GREAT. I have owned and used the iPhone since its launch in 2007 and while there have been modest improvements, there are many features which need to be improved to offset the novelty/trend loss over time.
The iPhone concept moves the iPod to obsolescence. What’s next?
In an age where technology is changing as fast as it does, why buy a company founded on principles which may be obsolete in the near future? Stay ahead of the game by doing what Apple does best, positioning themselves to take advantage of where the market is going next, not catching up to everyone else.
Obviously, Apple has been charging too much for their products and should offer a targeted stimulus program by offering all their customers credits on iPod and iPhone accessories.
Apple needs to keep the cash for now, invest in itself and continue to keep its unique culture. Once it buys someone else, it also buys that culture and to change a culture is like getting someone to change their personality. It takes a frontal lobotomy.
With a culture like Apple, acquiring another company would not be the best strategy. Apple is best when they think outside the box. Take that money an invest in the research of the next big idea that nobody knows they need yet but will become the next thing we can’t live without….
While Cash is King, Apple needs to continue to innovate. The company would be frustrated by any acquisitions.
Digital content delivery would be their next task. Simplify the TiVo system and get it into everyone’s homes. Then add in the delivery system that makes it easy enough for the 4 year old and the 84 year old to use it.
They will probably need some of it to keep the stores afloat as I see sales tanking right after Christmas (if not sooner). They have a strong product line and great associates and stores selling them. I would sit on the cash and use some for operations. When we clearly see the light at the end of the tunnel, then we can start developing new and exciting products.
Having used an iPhone and talking to other users, they might want to spend some of that cash coming up with a better network provider or that cash might find its way into the pockets of competitors who are developing better mobile devices.
Without doing the math, I like the idea of Apple extending its reach into other areas of digital delivery by acquiring a company like Netflix or Blockbuster. This allows Apple to merge a video content company into its iTunes business — while continuing to develop hardware (phones and computers) that deliver that content through increasingly sophisticated means.
Apple needs to be careful, however, to make sure that any acquisition can be re-invented to fit its business model. Blockbuster, for example, is still largely tied into its decade-old strategy rather than online video downloading. So there is value in its brand name, but not without some major concept development.
Apple should continue to do what it does best: innovate. Rather than buying an existing company like Netflix or TiVo, which come with their owns sets of positives and negatives, Apple should invest in itself to discover new devices that will lead the market in their respective categories.
I think Jobs is sounding the smart theme–cash is king. Yes, it is tempting to look at undervalued companies and think about making an acquisition. The real question remains: what would those companies bring to Apple? Some small purchases might add good ideas that could be built into current or future products. Large acquisitions tend to have a low success rate and could simply distract Apple.
Stock repurchases, while often done, are proving to be less and less attractive. Dividends are great, but only if you can keep them going over time. One-time special dividends also don’t add much. I am assuming Apple is investing heavily in R&D and doesn’t feel the need to add more spending there.
For the next year or two, keeping a large amount of cash around and not having any debt will allow Apple to ride out any rough patches and be in a great position to continue its growth when the economy recovers.
Apple should continue doing what it does. Great marketing and great new products. Not the best out there technically according to aficionados, yet the mix of style, marketing and retail is superb. R&D and next generation products is what is needed to plug into the mix.
Jobs may have thought of this already, but maybe Apple should invest some of that surplus in a design center–patterned after Porsche Design. It would develop products in other categories for other companies that would be sold under license. These could range fairly broadly across hard lines categories, from household appliances to automobiles to office equipment to furniture. If successful, this would only add to the cash hoard.
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I think you will see Apple become more aggressive on the M&A front, but you’re not likely to recognize the companies unless you’re in Silicon Valley. Apple’s recent acquisitions were PA Semi, Silicon Color, and Emagic. Apple tends to buy companies that bring specific IP, talent, or products to fit the overall strategy. Emagic, for example, made Logic, a key professional music production application, and discontinued the Windows version.
With all that cash, we may see Apple make bolder moves, but I expect they’ll be consistent with this philosophy: acquire companies that lock key technologies and markets into Apple hardware and the Apple “ecosystem” and/or keep Apple products well ahead of competitors. At some point we may see Apple make an acquisition to extend itself into a new marketplace, but one that is a logical extension of its existing business; maybe DVRs, media distribution, televisions, home automation/media serving, etc. A bolder move, but not unthinkable, would be to acquire a content publishing company, either music or movies, to capture some exclusive content for its iTunes ecosystem. Those companies’ revenues seem to volatile to fit the Apple model, however.
There are some ultra-rich, international preying sharks searching for innovative and cash rich companies such as Apple. It would be humiliating to have one bite off another American icon like when the Belgians captured Budweiser.
To lessen the likelihood of such a possible occurrence, Apple should use a goodly portion of their cash bounty for a larger R&D budget to invent the next generation of products that would keep Apple surging ahead of the pack…and be more valuable. Then, if there are extra bucks in their box, share them with the shareholders.
Cash is King, but R&D will make the registers ring!
If Apple wants to remain on top it should invest considerable amounts of its reserves into further R&D in order to stay ahead of the curve and to ensure continued dominance in phones and mp3 applications.
The iPhone is a very good phone but it is not GREAT. I have owned and used the iPhone since its launch in 2007 and while there have been modest improvements, there are many features which need to be improved to offset the novelty/trend loss over time.
The iPhone concept moves the iPod to obsolescence. What’s next?
In an age where technology is changing as fast as it does, why buy a company founded on principles which may be obsolete in the near future? Stay ahead of the game by doing what Apple does best, positioning themselves to take advantage of where the market is going next, not catching up to everyone else.
Obviously, Apple has been charging too much for their products and should offer a targeted stimulus program by offering all their customers credits on iPod and iPhone accessories.
Apple needs to keep the cash for now, invest in itself and continue to keep its unique culture. Once it buys someone else, it also buys that culture and to change a culture is like getting someone to change their personality. It takes a frontal lobotomy.
With a culture like Apple, acquiring another company would not be the best strategy. Apple is best when they think outside the box. Take that money an invest in the research of the next big idea that nobody knows they need yet but will become the next thing we can’t live without….
While Cash is King, Apple needs to continue to innovate. The company would be frustrated by any acquisitions.
Digital content delivery would be their next task. Simplify the TiVo system and get it into everyone’s homes. Then add in the delivery system that makes it easy enough for the 4 year old and the 84 year old to use it.
They will probably need some of it to keep the stores afloat as I see sales tanking right after Christmas (if not sooner). They have a strong product line and great associates and stores selling them. I would sit on the cash and use some for operations. When we clearly see the light at the end of the tunnel, then we can start developing new and exciting products.
Having used an iPhone and talking to other users, they might want to spend some of that cash coming up with a better network provider or that cash might find its way into the pockets of competitors who are developing better mobile devices.
Without doing the math, I like the idea of Apple extending its reach into other areas of digital delivery by acquiring a company like Netflix or Blockbuster. This allows Apple to merge a video content company into its iTunes business — while continuing to develop hardware (phones and computers) that deliver that content through increasingly sophisticated means.
Apple needs to be careful, however, to make sure that any acquisition can be re-invented to fit its business model. Blockbuster, for example, is still largely tied into its decade-old strategy rather than online video downloading. So there is value in its brand name, but not without some major concept development.
Apple should continue to do what it does best: innovate. Rather than buying an existing company like Netflix or TiVo, which come with their owns sets of positives and negatives, Apple should invest in itself to discover new devices that will lead the market in their respective categories.
I think Jobs is sounding the smart theme–cash is king. Yes, it is tempting to look at undervalued companies and think about making an acquisition. The real question remains: what would those companies bring to Apple? Some small purchases might add good ideas that could be built into current or future products. Large acquisitions tend to have a low success rate and could simply distract Apple.
Stock repurchases, while often done, are proving to be less and less attractive. Dividends are great, but only if you can keep them going over time. One-time special dividends also don’t add much. I am assuming Apple is investing heavily in R&D and doesn’t feel the need to add more spending there.
For the next year or two, keeping a large amount of cash around and not having any debt will allow Apple to ride out any rough patches and be in a great position to continue its growth when the economy recovers.
Apple should continue doing what it does. Great marketing and great new products. Not the best out there technically according to aficionados, yet the mix of style, marketing and retail is superb. R&D and next generation products is what is needed to plug into the mix.
Jobs may have thought of this already, but maybe Apple should invest some of that surplus in a design center–patterned after Porsche Design. It would develop products in other categories for other companies that would be sold under license. These could range fairly broadly across hard lines categories, from household appliances to automobiles to office equipment to furniture. If successful, this would only add to the cash hoard.