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4 Things Apple Can Do With $98 Billion

{complink 379|Apple Inc.} has about $98 billion in cash and short- and long-term securities and is discussing what to do with the fund, according to company executives. It's an important issue and one the company cannot continue to kick down the road. In a previous blog, I explained Apple needs to take a firm decision on how the money should be used. (See: Apple Fumbles the Cash Question.) Here are my suggestions.

  1. Pay dividends to shareholders:
  2. Yes, Apple shareholders are benefiting from the surging increase in the market value of the company, but the cash on its balance sheet equally belongs to them. The company has never paid dividends, but this is not carved in stone. It should distribute some of this to shareholders and keep a substantial amount in long-term investment.

  3. Secure the supply chain:
  4. Apple is quite good at this, and the hefty cash balance it has can help the company secure adequate supply of critical components years into the future. Through strategic alliances, Apple can fund component suppliers and guarantee sufficient supplies of parts. It has done this in the past, and this may become necessary again if it maintains its current giddy growth pace.

  5. Fund strategic IP/supply chain acquisitions:
  6. Again, Apple has been doing this. CFO Oppenheimer noted Apple typically has handled numerous acquisitions each year of “smaller or medium-sized companies that have just great engineering and other talent, a great start on a product or a technology that we'd like to bring into Apple, and sometimes including the IP.” I expect it to continue doing this, as it has more than enough funds for such acquisitions.

  7. Purchase non-competitive companies and transfer ownership to shareholders:
  8. Apple should also consider buying companies in fast-growth economic segments where it is not a player currently and doesn't expect to compete, and distribute this to shareholders. Such acquisitions, properly structured, may help the company's stockholders avoid paying the taxes they would have to pay on traditional dividends. While this move may be controversial, it will represent a novel use of cash built up in one industry and used to build value for shareholders in another economic segment.

Apple can do a combination of any of the above. Yet it may continue to sit on the cash, unable to break free of its past fears. Each quarter, management should expect analysts and investors to keep asking what they plan to do with the growing cash pile. It's another price they have to pay for being so successful, but it's a distraction they can also easily discard.

22 comments on “4 Things Apple Can Do With $98 Billion

  1. Barbara Jorgensen
    January 26, 2012

    Bolaji–as usual, you are on the leading edge of a discussion that has huge implications for the supply chain. I'm going to stick my neck out and ask the (probably obvious) question that has been plaguing me because of my limited experience in finance. Why does Apple need to do anything with its cash? My understanding has been cash makes a company a takeover target. Is Apple's shareholder value at risk if it doesn't invest some of theis money?

  2. Susie Inouye
    January 26, 2012

    Hi Bolaji.  Loved this article.  A little Philanthropy wouldn't hurt either.

  3. kilamna
    January 26, 2012

    Corporations are endowed with some rights and protections by society; they owe their existence to collective social authority, so they owe something to 'society' other than just maximizing shareholder profit-value.

    That businesses have accumulated such huge amounts of profits-cash is a clear indication that the market is not working, and Apple (as well as other corporations with profits exceeding a certain level) should return a portion of the cash as dividend to its past and present CUSTOMERS. 

  4. bolaji ojo
    January 26, 2012

    Hi Susie, I thought of philanthropy but thought people might object. I also thought the company could share the largesse with many more of its employees. But you know people might think the employees should be satisfied with their salaries.

  5. Ariella
    January 26, 2012

    @Bolaji According to this Apple is not very generous with its employees, and that doesn't even take into account the workers outside the US.

  6. garyk
    January 26, 2012

    As I mentioned last week on this subject. US owened companies manufacturing in CHINA, bring a higher percentage of the manufacturing jobs back to the US. As someone pointed out to me, many US companies provide hardware for the Apple products, yes but the manufacturing is done CHINA. What I heard on the News recently was that CHINA won't let the iphone in CHINA, that's funny it's made in CHINA! Let me go further 98 BILLION in CASH? Move Jobs back to the US and make only 49 BILLION. Pretty soon the US will loose the technology to manufacure any products examlpe: light bulbs, golf clubs, clothing, let me make it simple, when you shop for anything where is it made, make a mental note. Who owns the contract manufacturing in the US? What CM's are building hardware, equipment for Military products? 

  7. Mr. Roques
    January 26, 2012

    Maybe buy companies that are innovating in an specific area and stop them from releasing a new product until they are ready to add it to one of their mainstream products… :O 

  8. William K.
    January 26, 2012

    Strengthening the supply chain, and setting up producers of the more critical components in some disaster-immune areas of the US. Then possibly even build a phone production plant in the US. They could write it off as philanthropy, sinc it would certainly be a benefit to the area where it was built, and it would make their supply chain more robust. Also it would allow them some serious bragging rights about investing in the USA.

    Next, they could give all employees a bit of a raise. 

  9. Cryptoman
    January 27, 2012

    For a giant like Apple, I think the supply chain has to be as strong and secure as possible. This is particularly important at a time when most companies in the world are in a financial struggle. A supplier you are doing business with today may not be there tomorrow. Apple needs to have as many alternatives for a given part as possible in order to stay ahead of the game and to be able to innovate in a timely fashion. Therefore, part of the cahs should be spent on strengthening the supply chain.

  10. Daniel
    January 27, 2012

    Bolaji, I think the 4 options you had provided are very much valid. But instead of preferring any one option, I would like to suggest all the four options in a right proportion. So far Apple had not provided any dividends to the investors and hence it's necessary to share a part of cash with the investors. Meantime strengthen the company by different ways also more important because without a strong and healthy supply chain, companies cannot sustain for a long run.

  11. blakeredfield
    January 27, 2012

    When any entity reaches that level of economic freedom, my very very humble opinion is that they should turn to matters of public good.

    Apple has the funding and appeal to make staggering innovations in our global culture and the overall state and stature of our civilization as a whole.

    There is no greater endeavor than the exploration and colonization of space. Exploring space provides staggering commercial and technological advances. Colonizing space assures the survival of our race, by safeguarding against unexpected global disasters: biological, asteroid, nuclear war – whatever that may be. (I will defer further justification)

    If Apple leveraged their public appeal, ingenuity and commercialization engine they could colonize Mars within two decades.

    Some of you may remember what it was like back in the 70s, when the Apollo landlings gave everyone shivers – there was nothing we could not do. Manned Mars Mission was the next objective, and there was no doubt in our minds we could do it. But those plans got derailed.

    Ask yourselves if anyone would ever believe that 30 years later we would be holding a small tablet which would be a telephone, computer, library, gaming and office productivity machine – and that we would all have one? Surely visiting Mars would seem more plausible.

    Apple has the power to set history straight.

    Branson, Musk, Bigelow are demonstrating to the world what our cultural responsibility is. As an apple stockholder I say you can keep your dividends if in turn you can give our children something to be proud of. Microsoft beneficiaries have been supporting numerous scientific and technological developmets (SETI, space access, lunar exploration, student sat sponsorships, the list goes on..)

    Steve left us with the tools for discovery in our hands and an organizational ecosystem with limitless potential. What we do from now on is our responsibility. What do you think would put a smile on his face?

    Corprorate positioning and takeovers or an Apple Space Exploration Program?

  12. bolaji ojo
    January 27, 2012

    Blakeredfield, Great suggestions for Apple and even more credible coming from a shareholder. The company grew, though, by focusing on making great products from which it can make a lot of money. Do you really see a philanthropy culture or one that aspires to change our world along the lines you discussed?

  13. ahdand
    January 27, 2012

    I think No.2 and No.3 would be really good since I feel that Apple is in a very crucial stage where they need to focus a bit more than they used to do. Once they secure their place they can look in to No.4 and strengthen their share. 

  14. Wale Bakare
    January 28, 2012

    I would like see Apple dole out its fund on options 2 and 4 suggested. Securing supply chain could save Apple lot of hassles. As well, acquiring new innovation may pretty spur things up – cloud computing ( data center ) i dont think venturing into this sector is bad.

    Investing a fraction of the huge cash in developing markets like south America and Africa may boost Apple's presence in those areas.

  15. Taimoor Zubar
    January 29, 2012

    Do you really see a philanthropy culture or one that aspires to change our world along the lines you discussed?”

    Interesting suggestion by Blakeredfield. I do agree that it may be a good idea to invest into something as diverse as space exploration programs. I don't think these would really come under philanthropy. There are ways Apple can derive commercial value out of these in the long-run.

  16. Anna Young
    January 29, 2012

    It's good to know that Apple is strategically seeking ways to better use its cash piles.

    This is what Peter Oppenheimer Apple's Chief financial officer said  ” we are actively discussing the best usage of our cash balance”

    Who knows whether many of the suggestions raised here might come in handy, when the company finally arrive at a decision on how to best use its cash.  Well, I think  the company is loudly saying, we are in control of our cash surpluses and will dispense of it when and if necessary. Rightly so too. So lets wait and see what Apple comes up with.

  17. Ashu001
    January 29, 2012

    Bolaji,

    You pinpointed some very useful ways in which the Cash pile Apple sits on today can be utilised.But you missed one very crucial fact-Why are Tech Giants like Apple,Microsoft,Google,Oracle,IBM,HP,Cisco,Intel,etc,etc sitting on Billions and Billions of Dollars of Cash???

    This is not something which is new or just a one,two year phenomenon.

    Also,where is this cash held?

    For those not in the know this cash is held in Offshore Tax havens like Bermuda

    http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes.html

    And these are part of these companies overseas earnings(money made outside of the US),which will not come back to the US unless there is a revamp of the Tax-code or a one-time Tax Holiday.

    Thing is as things stand,if companies bring that money home to the US Today and uses it to disburse dividends the tax-rate would be very,very high(Over 30%).And which self-respecting company(who can hire the best and brightest lawyers in the world)wants to pay such a gigantic amount in Taxes???

    So the question comes back-How about using some of those Billions to Lobby congress for a re-vamp or better still- A Flat Tax code???

    Regards

    Ashish.

  18. bolaji ojo
    January 29, 2012

    Ashish, You are right. A major part of the cash held by companies like Apple is in accounts outside the US and the companies don't want to bring this back because of the likelihood they will pay a high tax on it. The current tax code exempts US-based companies from paying taxes on these funds as long as they are held in offshore accounts and as long as the companies can claim they are holding the money for possible reinvestment.

    Should the US government simply cave and allow them to repatriate the funds at a lower tax rate? The government did this before and Microsoft at the time paid out over $30 billion. That's the way it works but is this right? Apple made the profit both in the US and outside and like other companies it is using the benefits of the current tax code to avoid paying tax on the money.

    The company can use this to pressure Congress to pass a special law that allows them to bring the funds in at a low tax rate but this again would be another example of what is wrong with US tax laws. How soon before Apple builds up another cash heap and then start asking for another tax holiday? Is this really the best solution or a stop-gap measure until they find themselves in the same position?

  19. bolaji ojo
    January 29, 2012

    TaimoorZ, If there's no commercial or profit benefit from a space program or any other program for that matter most companies won't get involved notwithstanding the amount of unneeded cash they have floating around. The same applies to Apple. It's in this for the money and even in philathropy, you can expect the company to always be on the lookout for how it can get its image burnished. As Pasquale Pistorio, the legendary former CEO at STMicroelectronics used to say, “you can do good by doing good.”

  20. Ashu001
    January 30, 2012

    Bolaji,

    Which is why I was suggesting Lobbying for a Total re-vamp of the Tax code.

    We need a Flat Tax of no more than 18% with No Exemptions/Tax-breaks,etc for all Corporations.

    As has been proven quite decisively in the case of both Oil& Gas companies as well as Solar companies-Subsidies don't help the market one bit.[Oil & Gas companies continue to make record profits and Solar companies continue to go bust-Solyandra & Ener1 come straight to mind].

    I know you may disagree with the Number(18%) I talk about here.But most corporations today anyways pay much-much less than number.[Which is why you see today that Personal Income Tax reciepts have surprassed the number paid by Corporations at the Federal Level].This flat tax will just enable them to come clean entirely.

    While I don't think its fair that American Companies should be taxed at all on their overseas Incomes(just like I think its beyond stupid that American Citizens working anywhere in the world have to pay Personal Income Taxes to Uncle Sam]… One cannnot ignore budgetary realities.Currently America is running a Gigantic Deficit and the numbers are just spiralling totally out of control;in that sceanario America needs to pull in as much Tax revenue from as many sources as is possible.

    This is just one case where this policy has gone totally wrong and further antaogonized a new Generation of Americans

    http://mises.org/daily/5666/The-Attack-on-Accidental-Americans

    Regards

    Ashish.

     

  21. Ashu001
    January 30, 2012

    Bolaji,

    I agree.

    And most importantly,I think the Market agrees as well.

    Silly moves which have no relation to the current Business of the company need to be avoided entirely.

    I am quite sure if Apple does make a silly move( like moving into Space exploration),the market will disagree big-time by rapidly dumping Apple stock.

    Definitely not the right way to do business and/or utilize that cash pile.

    Regards

    Ashish.

  22. Ashu001
    January 30, 2012

    Bolaji,

    Anytime,you want to change an existing situation it helps a lot if you look at and understand who benefits the most from the current situation.

    So in this current sceanario,who benefits the most (with this Cash pile which supposedly can be utilized very quickly to do great things by Apple)???

    For this,you need to look at the Compensation structure of senior-most Apple Executives.

    Most of them are paid a disproportionate amount of their salaries in Stock options.

    Now think about it,would these Stock options have more value if the stock was supported by more Cash behind it(on the Company Balance sheet) or less???

    Obviously,the stock options have more value if they are supported by more cash behind them.After all,when the senior execs excercise those options(this is what Steve Jobs always did) ;they never held the stock,just dumped it on the market.

    The market consisting of hardly any original ideas and is just one momentum chaser after another,grabbed the stock without wondering ;If Apple is such an awesome company ,why don't Senior Execs hold onto the stock???

    Obviously there are other beneficiaries as well-Like The Overseas Tax havens where Apple has stored all this cash and Tax Consultants & Lobbyists.

    But the biggest beneficiaries are obviously senior management.

    You have to follow the money to get to the bottom of the matter.

    Regards

    Ashish.

     

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