Join us live 24/7
Listen On Any Phone …
Facebook Like Us
Halfway through the second quarter of the 2013 fiscal year, most of Apple‘s top execs meet at an undisclosed location (Eddy Cue’s chair is empty – he’s been called away to a Ferrari board meeting). They’re joined by a few trusted industry insiders: Bill “the Coach” Campbell, Apple and Intuit director and adviser to Google’s founders, Larry Page and Sergey Brin; Larry Sonsini, the Silicon Valley consigliere of more than three decades; and Frank Quattrone, the star investment banker with nine lives.
The meeting isn’t about the company’s dwindling profit margins. The smaller margins were expected and invited: The reduced-price iPad and heavy promotion of the “old” iPhone 4 as an entry-level product are part of the long term strategy of guarding Apple’s lower end (so to speak). And no whining about AAPL’s grim slide over the last six months, a problem that has only one solution: Apple needs to record a series of better quarters.
The problem of the day is, once again, what to do with Apple’s obscene pile of cash.
By the end of December 2012, the company held about $137bn in cash (or equivalents such as marketable securities), including $23bn from operations for the quarter.
CFO Peter Oppenheimer delivers the bad news: It looks like operations will disgorge another $35bn this quarter. The stock buyback and dividend program that was designed to bleed off $45bn over the next few years (see this March 2012 Monday Note) won’t be enough if the company continues at this rate.
Apple needs something bigger.
Quattrone has been sitting quietly at the end of the table. He clears his throat and speaks:
Well, yes, Frank (says Tim Cook), we’ve been buying Intel processors for the Mac since 2005.
Not the chips. The company. The planets are aligned for Apple to strike a blow that will leave the industry forever changed. Make history, acquire Intel.
Quattrone has their attention. He unfolds the celestial calibration:
A lively discussion ensues. Imagine solving many of Apple’s problems with a single sweeping motion. This would really make Cupertino the center of the high-tech world.
It’s an interesting idea, but there will be obstacles, both cultural and legal.
The coach goes first: “Knowing both of these companies more than a little bit, I can attest to the pride they have in their respective cultures. They’re both disinclined to reconsider their beliefs in any meaningful way. Merging these two dissimilar groups, shedding unnecessary activities such as McAfee and the like would be dangerously disruptive to Apple’s well-honed, cohesive culture. As a general rule, merging two large organization rarely succeeds… unless you consider merging airlines a success…”
Finally, the consigliere speaks: “It’s a tempting fantasy, it will mean years of work for my firm and many, many others, but as a friend of the company, as a past confidant of your departed founder, don’t do it. There will be too much legal trouble with the feds, with competitors, with Intel partners. Most fantasies aren’t meant to be enacted.”
I won’t dwell on the reality of the meeting: I made it up as a way to explain why Apple really has no choice other than submit to another cash phlebotomy, this time for an additional $60bn. And, as with real-world phlebotomies, the procedure will treat the problem, but it won’t cure it. With $30bn from operations per quarter, the $60bn lancing will have to be repeated.
Some read the decision to return gobs of cash to shareholders as an admission of defeat. Apple has given up making big moves, as in one or more big acquisitions.
I don’t agree: We ought to be glad that the Apple execs (and their wise advisers) didn’t allow themselves to succumb to transaction fever, to a mirage of ego aggrandisement held out by a potential “game changing” acquisition.
A final word on taxes. To return the additional $60bn (for a total of $100bn when including the ongoing programme announced last year) through increased dividends and repurchased shares, Apple will have to borrow money.
Borrow? When it has so much cash?
Yes, thanks to our mangled tax code. As explained here, about $100bn of Apple’s cash is stored overseas. If repatriated, it would be “heavily” (read “normally”) taxed. Like most US companies that have international operations, Apple plays complicated, entirely legal tax games that allow their international profits to be taxed at very low rates as long as the profits — and the resulting cash — stay outside Uncle Sam’s reach. And thus we have the apparent paradox of borrowing money when cash rich.
The benefit of these tax code contortions is difficult to explain to normal humans — as opposed to legislators who allowed the loopholes.
All this now makes Apple a different company. Once a fledgling challenger of established powerhouses such as IBM, Microsoft or HP, it now makes “too much cash” and is condemned to a life of paying dividends and buying back shares — like the old fogies it once derided.