Does Apple Really Need Its $40 Billion?

There are a lot of different words that are used to describe Steve Jobs' approach to running Apple (some more pleasant than others). I think we can all agree that "conventional" isn't one of them. Based on Jobs' comments last week, it's safe to say that this disregard for convention extends to financial matters. But in this case, Jobs' originality might be less a sign of his distinct brand of genius than a strong paranoid streak.

As Matt Koppenheffer noted on Friday, Jobs recently shot down the idea that Apple (Nasdaq: AAPL  ) would return to shareholders any part of the massive cash hoard it's amassed from the booming sales of its shiny gadgets. The high priest of the Church of Apple justified his stance by arguing that the company's cash and investments, which now total more than $40 billion (larger than Guatemala's GDP, for those wondering), gives his company "security and flexibility" when it comes to making future moves.

A reluctance to make big moves
However, even a quick look at Apple's acquisition history makes it clear that this isn't a company with a habit of doing high-profile deals that take a huge bite out of its balance sheet. In fact, the company's largest moves in recent years have been its $268 million acquisition of chip company PA Semi in 2008, and its $275 million buyout of mobile advertising firm Quattro Wireless this January.

This reluctance to make splashy, expensive acquisitions seems to be a direct result of Apple's unique business philosophy. As its supporters will vouch, the company is fanatically obsessed with quality control, and on adhering to its own particular vision of what a piece of hardware or software bearing the Apple logo should look like. Unlike, say, Google (Nasdaq: GOOG  ) , which is often content to let an acquired company function as a relatively independent unit, Apple's obsessions would drive the company to completely rework the product line of any big-name tech company that it acquires, so that its products fully conform to its vision.

So while Apple's cash pile might theoretically give the company the "flexibility" to snap up a Garmin (Nasdaq: GRMN  ) or TiVo (Nasdaq: TIVO  ) , the likelihood of such a move seems pretty remote. Based on Apple's historical way of looking at things, the product-integration headaches would be too big, and the risk for damage to its stellar brand too great. Smaller moves aimed at picking up useful technology and/or rounding out the feature sets of its platforms have been far more to the company's liking.

Is Hollywood a target?
The one area where I could see Apple truly opening up its purse strings a bit is in deals with media companies. Given its squabbles with Hollywood studios regarding the availability and pricing of iTunes content, the company might decide to use some of its billions to make "strategic investments" in the likes of Disney (NYSE: DIS  ) and Viacom, or maybe gaming giant Electronic Arts (Nasdaq: ERTS  ) , with the goal of guaranteeing the long-term success of iTunes (and indirectly, Apple's consumer electronics hardware). But if the history of such moves is any guide (Microsoft's (Nasdaq: MSFT  ) investments in Comcast and AT&T are good examples), the total cost of the deals are unlikely to come anywhere near $40 billion -- never mind the $60 billion or $70 billion that Apple might soon have on its hands, given its tremendous cash-generating ability.

Steve Jobs likes to be in control, whether over the minute details of his company's products, or the enormous sums of money these products have created for his company. In the former area, this need for control has mostly worked to his shareholders' benefit. But I'm not so sure that's true in the latter.

Fool contributor Eric Jhonsa has no position in any of the companies mentioned. Walt Disney and Microsoft are Motley Fool Inside Value choices. Google is a Motley Fool Rule Breakers recommendation. Apple, Walt Disney, and Electronic Arts are Motley Fool Stock Advisor picks. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


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  • Report this Comment On March 01, 2010, at 3:39 PM, TMFNato wrote:

    Jobs was kicked out of the company that he co-founded, and watched it wither and nearly die under a series of inept successors. I suspect that his insistence on hoarding cash stems, whether he'll admit it or not, on Jobs' personal desire to make sure that the company he built is so well-capitalized that it'll never come so close to death again.

  • Report this Comment On March 01, 2010, at 4:08 PM, ConstableOdo wrote:

    I think Apple could have a need for it. Let's say Apple wanted to build out or invest in some infrastructure for WIMAX or LTE in larger cities. Recently it was mentioned that Apple intends to open 25 retail stores in China but I suppose that doesn't add up to very much. One thing for certain, if the economy takes another downturn, Apple will be able to afford to keep lots of people on the payroll in their retail outlets to continue to give excellent customer support. Apple also uses that cash to buy NAND memory in advance and likely controls the industry with a pricing advantage.

    Not too many companies can just order up $500 million of supplies without blinking. Apple has so much leverage for buying up huge quantities and getting serious discounts which will keep profits at a maximum. I believe that Apple is still in growth mode and needs to have that much cash to stay nimble against Google and Microsoft.

  • Report this Comment On March 01, 2010, at 4:29 PM, makelvin wrote:

    Steve Jobs got kicked out of Apple back in the mid 80s has nothing to do with Apple was not doing well financially. Actually at that time, Apple was doing quite well. He was removed because there were some very fundamental differences between him and Sculley which was someone Jobs hired from Pepsi to be the CEO of Apple at that time.

    Jobs was not the easiest person to work back then and also the board members prefers someone with a more traditional business background to manage the company so they sided with Sculley and his direction and ultimately ended up removing Jobs in the process.

  • Report this Comment On March 01, 2010, at 4:37 PM, Hoxsie454 wrote:

    As an Apple shareholder, I am very content to have $38 billion in the bank, thank you! When the need arises, as it someday will, that cash hoard is going to keep Apple safe and secure. It will underwrite new product development.

    The only downside to having so much cash is that there should be no premium value assigned to cash, so it does not inflate market capitalization. So,

    some of it will doubtless be used to make just the right acquisition when that opportunity comes along. TiVo could probably be bought for about $1.4 Billion, and in my opinion that could occur sooner rather than later.

  • Report this Comment On March 01, 2010, at 5:57 PM, TMFKopp wrote:

    After thinking about it, I was able to come up with a good reason for Apple to not part with any of its cash -- if Jobs threatens to step down as CEO if he's forced to pay a dividend (or buy back shares). He seems to have done a great job on the product front since coming back on and I'm not sure that paying out cash right now would be worth losing him at the top spot (though I could be wrong).

    Other than that, the policy is lazy and poor capital allocation. That's all there is to it.

    As I said in the article that Eric linked to, it's bad for shareholders that the cash is just sitting around and there aren't really good justifications. Of course, that doesn't mean that current shareholders should sell on that basis alone. The company could still do well, it's just that shareholders will have to wait for any of the profits to get to them and they have to cross their fingers that management won't do something stupid with the money in the meantime (like a big acquisition).

    What I think would be really cool is if shareholders rallied around this point and they (the OWNERS) got the company to do the right thing.

    Matt

  • Report this Comment On March 01, 2010, at 6:42 PM, beetlebug62 wrote:

    Steve has already bought Disney, or have you forgotten?

  • Report this Comment On March 01, 2010, at 6:47 PM, jameskatt wrote:

    Why throw money away?

    Cash is king. Cash gives Apple the stability to invest in bad times - unlike other companies. Cash gives Apple the opportunity to get the lowest prices on components - by paying ahead of time.

    Look at where Apple is spending:

    1. Expanding the number of Apple Stores - with at least 25 in China. This is going to cost billions of dollars.

    2. HUGE Data Center in North Carolina. This is going to cost $2 Billion

    3. Creating its own chips. The A4 cost 1 billion. New models can cost just as much.

    4. Paying for Flash components ahead of time. These deals cost at least $500 million apiece.

    5. etc. etc.

    These expenses make it easy to spend all that money.

    The cash pile also lends support to Apple's stock price. Apple's stock cannot go down to zero because a significant amount of it is supported by the cash.

    Apple doesn't need to borrow - like other companies - to spend. This gives Apple FREEDOM that other companies don't have.

    Microsoft has $30 billion in cash. Spending it on dividends or stock buybacks DID NOTHING to improve the price of Microsoft's stock.

    Google has $30 billion in cash.

    No one is asking Microsoft or Google to give its cash away.

    Apple uses cash as a weapon in competition with its foes.

    The cash gives it great leverage in reducing component prices so that Apple can garner 30 to 55 % profit for each product sold. This is HUGE compared to Dell's 0.5% profit margin.

    Cash is KING. Apple will keep it.

    As an Apple Shareholder through good and bad times (with over 50 death notices on Apple through the years), it is the cash that keeps Apple alive and stable and thriving.

    Go Apple. I fully support Apple keeping its cash.

    Cash is KING.

  • Report this Comment On March 01, 2010, at 6:48 PM, beetlebug62 wrote:

    @TMFKopp? Huh?!? "something stupid"? I thought that was what Eric was proposing, "a big acquisition". Are you saying his idea is stupid?

    Sure it's a poor return on investment, I'd like to see half given to shareholders, as $15 to $20B is enough loose change for any company. It's more likely to be returned if people stop obsessing about it.

    Otoh, cash preservation during a recession seems to have been a winning investment strategy!

  • Report this Comment On March 01, 2010, at 6:49 PM, jameskatt wrote:

    Another thing:

    If Apple has to forcibly take over a company, it has the cash to do it at a moment's notice.

    For example, if Kodak wins its patent fight or if Nokia wins its patent fight with Apple, Apple can OWN Nokia with part of its cash.

    Thus, Apple's cash allows it to have a weapon against disaster.

  • Report this Comment On March 01, 2010, at 6:51 PM, jameskatt wrote:

    Another thing:

    With so much cash, Apple can protect itself against lawsuits.

    For example, if Kodak or Nokia was successful in their patent fights against Apple and can force the US to stop incoming shipments of Apple's products, Apple can fight back and AGGRESSIVELY TAKE OVER THESE TWO COMPANIES with its cash. Apple can then liquidate these companies while keeping the IP, and fire their CEOs.

    Apple's cash is a doomsday device. It protects Apple against aggression from other companies.

  • Report this Comment On March 01, 2010, at 11:01 PM, dolphid444 wrote:

    Jobs strategy for recession and depression has been around awhile. Have the cash required to keep the folks on the team together to continue to make the best products on the planet. When everyone is laying bodies off, Steve is making sure his folks are hunkering down to make the best new widgets not yet thought up by anyone. Then when the economy turns around and folks have some jingles in the pockets, Apple has something really neat available for them to spend their hard earned bucks on ... and the rest of the industry plays "catch up." I cite here the iPod, the iPhone, and confidently, the iPad ... Go Apple

  • Report this Comment On March 01, 2010, at 11:22 PM, dstb wrote:

    Does Apple Really Need Its $40 Billion?

    No. It is a security blanket. That's it. They WANT the cash but they don't NEED the cash. They cannot put it all to work on high return projects, therefore, they should return the excess to shareholders.

  • Report this Comment On March 01, 2010, at 11:22 PM, dstb wrote:

    Does Apple Really Need Its $40 Billion?

    No. It is a security blanket. That's it. They WANT the cash but they don't NEED the cash. They cannot put it all to work on high return projects, therefore, they should return the excess to shareholders.

  • Report this Comment On March 02, 2010, at 5:35 AM, TheSavageNation wrote:

    People are thinking inside the Silicon Box, how about outside the Computing Box, and into the C.E. box?

    Apple should buy out Sony, or LG. Then they could make ANYTHING. But SJ won't because those brands have certain non Apple flavors already. How about

    Apple Telephone & Telegraph? Apple Wireless? No? Still can't forget about eWorld, eh?

  • Report this Comment On March 02, 2010, at 8:39 AM, jameskatt wrote:

    As an Apple Shareholder for years, I abhor the idea of returning excess cash to shareholders.

    All that does is weaken the company. It does nothing to improve the stock price.

    Yes, it is a security blanket. Precisely. And after all the years of Apple death notices (with more than 50 such), a security blanket is exactly what Apple needs.

    Apple's marching orders from its shareholders are:

    0. Absolutely Survive.

    1. Make the best products it can.

    2. Make the most profit.

    3. Save lots of cash to use as a weapon.

    Apple is satisfying me in achieving these goals.

    When Apple was in its death throes, it had 4 billion in cash. This was the lifeline that kept it alive and gave its stock value. At that time, Apple's market cap was 4 billion.

    40 billion is proportionally very little given how its market cap is now 200 billion.

    As they say, Big Boys have Big Toys. And Apple's toy is big but not big enough. I would be very happy if Apple had 200 billion in cash.

    If Apple had 200 billion in cash, it can FORCIBLY take over nearly any company.

    If Apple had 200 billion in cash, its market cap would be 600 billion. And its stock would continue to make we, shareholders, very rich.

  • Report this Comment On March 02, 2010, at 8:55 AM, TMFGebinr wrote:

    But as a weapon for what?

    As Eric pointed out, it doesn't acquire companies. It's made about 12 deals in the last decade and none of them topped $500 million. Management is not putting the money to work reinvesting in R&D -- it has plenty from cash flow alone for that purpose. Why in the world would it want to take over some other company when it is doing so very well as it is?

    $15 billion to $20 billion is more than enough for the needs it has demonstrated over the past five years. @dstb is right: That cash hoard is nothing more than a security blanket and management is being negligent to not return part of it to the company's owners.

    2% or so return on cost of capital close to 10%? That's destroying value, not creating it. And the longer it holds onto the cash, the greater the return will have to be on whatever project it ends up investing in (if anything) to justify having held it for so long.

    Management has a fiduciary responsibility to seek the best returns for the company and its owners. Sitting on a hoard of cash, wrapping it around oneself as a security blanket and sucking one's thumb is not responsible.

    Jim (TMFGebinr)

  • Report this Comment On March 02, 2010, at 8:56 AM, psngray wrote:

    Why is everyone in such a hurry to spend the hard earned cash that Apple's has built up? Is anyone of us as good at being the Apple CEO as Steve? The only ideas I've heard so far for making acquisitions are ridiculous and way out of Apple's expertise. Here we have a strong, well capitalized company and people are coming out of the woodwork to demand they get into to every cockamamie scheme imaginable. They know what they're doing at Apple, be happy.

    As for giving it to the investors, surely you jest! You already own one of the best stocks on the market, what else do you want?

  • Report this Comment On March 02, 2010, at 9:10 AM, Turfscape wrote:

    jameskatt wrote:

    "Microsoft has $30 billion in cash. Spending it on dividends or stock buybacks DID NOTHING to improve the price of Microsoft's stock."

    It gave shareholders cash in their pocket...or if they are enrolled in a DRiP, additional shares. It improves the value for the individual shareholder.

    If AAPL decided to pay a dividend, I'd be very happy. I'm not going to demand it, though, because Jobs & Co. have made very good decisions over the last ten years and my value in the company is excellent. I'll carry on with the assumption that there are plans that go beyond Q1 2010, and those plans will require cash. I don't assume those plans will require $40B in cash...but AAPL should continue to hold a cash reserve after any significant expenditures.

  • Report this Comment On March 02, 2010, at 10:54 AM, Superdrol wrote:

    @ TMFKopp: I didn't understand this statement made earlier above.

    "After thinking about it, I was able to come up with a good reason for Apple to not part with any of its cash -- if Jobs threatens to step down as CEO if he's forced to pay a dividend (or buy back shares). He seems to have done a great job on the product front since coming back on and I'm not sure that paying out cash right now would be worth losing him at the top spot (though I could be wrong)."

    ------------------------------------------------------------------------------------

    My own point is Apple has not indicated anything that would require such a cash hoard. I've contacted investor relationships and from the correspondance that I've had with them, it seems more as a security blanket than anything else.

  • Report this Comment On March 02, 2010, at 12:49 PM, langco1 wrote:

    apple's money is up to its shareholders to decide what to do with...

  • Report this Comment On March 02, 2010, at 2:28 PM, grant224 wrote:

    ^

    Democracy in it's purest form i guess...

  • Report this Comment On March 02, 2010, at 2:35 PM, Turfscape wrote:

    langco1 wrote:

    "apple's money is up to its shareholders to decide what to do with..."

    Yeah...Steve Jobs is a shareholder...a really big shareholder...so his opinion does, in fact, matter.

  • Report this Comment On March 02, 2010, at 2:40 PM, AaronGaz wrote:

    They need the money to develop a gigantic Macbook

  • Report this Comment On March 02, 2010, at 2:48 PM, TMFKopp wrote:

    @superdrol

    My point was that it may not be worth losing Jobs in order to get the company to pay out some of that cash. In the unlikely scenario where shareholders absolutely demanded a dividend and Jobs' response is "it's either me or a dividend," I'd say it's probably worth sticking with Jobs.

    What I find interesting is the number of people that commented that a dividend wouldn't do anything for Apple's share price. To that I say, "who cares?" Surely not everyone invests the way I do, but I tend to invest as if I'm buying a piece of a business, not a piece of paper. My focus is on the total returns I'm getting, not just the current market prices of the piece of paper I hold.

    In other words, yes, distributing a bunch of cash would likely bring down the stock price, but the total returns to shareholders would likely be better.

    If Apple pays out a $10 special dividend, you theoretically now still own Apple the great growth company (now with a share price of around x - $10) and you have $10 in cash that you can invest elsewhere... or heck, reinvest in Apple shares. Since the cash isn't being used by Apple, it won't do anything to its returns (though lower equity will mean a higher return on equity). Meanwhile, you're getting better use out of the cash by reinvesting it in a higher-return opportunity.

    Of course it's also worth pointing out that a regular dividend can be a great stabilizing agent for a stock price. As a stock price falls, the dividend yield rises and you'll have an increasing number of yield-seeking investors stepping in, providing a cushion for a falling stock price.

    Matt

  • Report this Comment On March 02, 2010, at 2:51 PM, TMFKopp wrote:

    @Turfscape

    Check out the most recent proxy... Jobs owns less than 1% of the company.

    http://www.sec.gov/Archives/edgar/data/320193/00011931251000...

    Matt

  • Report this Comment On March 02, 2010, at 4:25 PM, Turfscape wrote:

    @TMFKopp

    Yeah...but 5.5 million shares is a LOT more voice in the matter than anyone on this forum has.

  • Report this Comment On March 03, 2010, at 3:15 AM, PoundMutt wrote:

    When the dollar tanks - hyperinflation a la the infamous devaluing of the Hungarian Pengo in 1945 and 1946 - how much will $40 Billion buy? A SLICE of bread? Less?

    One could exchange 5 pengos for one dollar at the beginning of World War II. But in 1946, it cost 460 octillion pengos to get one dollar in return. Yes, I said octillion. As in 10 to the 29th power.

  • Report this Comment On March 03, 2010, at 5:23 AM, marc5477 wrote:

    Although I like the idea of holding cash, I have real life experience with people losing their fortune doing so.

    Back in 1988, in a certain rich country, you could buy big mac for around 10 cents. After a slight problem with the world, their currency became so inflated that you need $10,000 to buy a dozen eggs. today

    I am not saying that this will happen to Apple, but the point is that I have seen cash fizzle to nothingness almost overnight. Ironically when the dust settled, the companies that came out on top were those with huge leverage in real estate. They were able to repay their leverage easily and the value of their land adjusted to inflation after a few years.

  • Report this Comment On March 03, 2010, at 1:26 PM, Superdrol wrote:

    @TMFKopp,

    Why would Steve Jobs leave Apple though over giving away the cash ? That scenario seems a bit 'extreme'.

    On that point though, Apple has been getting more pressure now vs. in the past about returning something to the shareholders. As a shareholder myself, I'm kinda glad this is getting headwind. Gets Apple to actually start listening more carefully.

  • Report this Comment On March 04, 2010, at 5:54 PM, rfaramir wrote:

    PoundMutt is right ("how much will $40 Billion buy? A SLICE of bread?"). Hyperinflation is the worry when you're sitting on such a pile of dollars that are (they admit) invested in short term government bonds.

    As much as I'd love a dividend (even a small one, please?), I'd feel much safer if I knew their hoard were in gold/silver/oil/copper or anything tangible that will go up in price as inflation is felt.

  • Report this Comment On March 05, 2010, at 9:15 AM, mikecart1 wrote:

    This is why I will never invest in AAPL. Bunch of idiots working over there.

  • Report this Comment On March 06, 2010, at 3:12 AM, motleychang wrote:

    Remember Jobs had to go to his friend in microsoft , cap in hand to "borrow" $200m. That was pain.

  • Report this Comment On March 06, 2010, at 4:44 PM, marstong wrote:

    Apple should buy Facebook. Look Facebook is worth between $10-$20 billion. That's nothing to Apple who is worth $200 billion.

    Apple could then merge iphoto, itunes and facebook into a true 'ilife' product. With the traffic, Apple would be a serious competitor to Google and would be creating a platform not only for $600-$1 billion in advertising revenues buy also to target its smart phone, ipad, and physical products.

  • Report this Comment On March 06, 2010, at 11:32 PM, mikecart1 wrote:

    marstong, that is the worst idea of all time; first of all you don't buy companies just because your market cap is worth x amount; do you know anything about investing?

    aapl has $40 bil in cash not $200 bil

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