
Apple Puts Carl Icahn's $150 Billion Buyback Proposal To Shareholders - kirtijthorat
http://www.forbes.com/sites/timworstall/2013/12/28/apple-puts-carl-icahns-150-billion-buyback-proposal-to-shareholders/
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JumpCrisscross
Apple's operations, net of capital investment, generate north of $40 billion a
year in cash flow. The $146 billion cash pile it declared in its last 10-K [1]
earned a 1.03% weighted return. This is the motivation for returning cash -
shareholders can likely earn more than what Apple is earning on its cash.

But $111.3 billion of that $146 billion is held overseas. Repatriating it is
expensive - around 40% of the amount. The present dividend programme costs $35
billion annually. This effectively consumes the U.S. cash pile and cash flows.
Anything more would require borrowing.

Why borrow? The bet is that the interest paid on the borrowing is less than
the gap between what investors _could_ earn on their cash (~6.45% long-run S&P
500 return less a risk premium) and what Apple _presently_ earns (~1%).

> _Spending down a cash pile is one thing, gearing up to finance one something
> of a different question._

This doesn't make sense - borrowing to repatriate cash isn't "gearing up to
finance [a cash pile]." The cash is there, it's just overseas. If push came to
shove it could be used to extinguish the debt through some other anti-tax
vehicle or by taking the I-didn't-plan-sufficiently penalty.

[1]
[http://www.sec.gov/Archives/edgar/data/320193/00011931251341...](http://www.sec.gov/Archives/edgar/data/320193/000119312513416534/d590790d10k.htm)

~~~
hosh
So I get the idea is that Apple is returning cash because shareholders can
likely earn more than what Apple is earning on its cash.

But doesn't that also read: Apple doesn't have any major new (ipod-level or
iphone-level) thing in its pipeline, so it is unlikely to make use of a war
chest effectively?

~~~
yapcguy
Yes, I agree.

Steve Jobs refused to pay dividends, he built a war chest for a rainy day. He
was opinionated.

On the other hand, Tim Cook is weak. Instead of pumping money into R&D he is
courting Wall Street. Dividends. Stock buy-back.

Tim Cook was hyped up as a slick operator, an operations guy who built up
Apple's supply chain to be super efficient. Truth is, he is/was no better than
any other operations guy using an Asian based supply chain.

Look at the problems with the iPad Mini Retina screen which have yellow
streaks, or the image retention burning laptop screens, or delay in iMacs, or
sneaking a couple of Mac Pro units out at Christmas.

~~~
jonknee
> On the other hand, Tim Cook is weak. Instead of pumping money into R&D he is
> courting Wall Street. Dividends. Stock buy-back.

Tim Cook has both pumped money into R&D and into dividends/repurchase...
According to their filings, R&D spending (in fiscal years):

    
    
       2013 - $4.48B
       2012 - $3.38B
       2011 - $2.43B
       2010 - $1.78B
    

He has also put a ton of money into operations (paying for factories, locking
in huge volumes of components, all available air freight capacity, etc etc).
And a ton of money into Apple Stores. At the end of the day $40B is a _lot_ of
cash to put to work.

Apple could hire 1,000 engineers at a cost of $250,000 per year and it would
only be 0.625% of $40B (and it's actually more like $50B because that would be
pre-tax). 10,000 engineers is still not far off from a rounding error.

Apple is waiting around until Democrats will let them bring back cash without
a tax hit and then they'll make a special dividend. No financing magic needed.

~~~
yapcguy
Thanks for correcting me on the R&D, I was under the impression (based on
product output) that nothing had changed and had in fact worsened.

I still don't rate Tim Cook though - he allowed Maps out of the gate. Scott
Forstall took the fall for that one, but Tim Cook was ultimately responsible.

~~~
ghshephard
...And Steve Jobs let MobileMe out of the gate. If you rate anyone based on a
few missteps instead of the aggregate of their performance, you are missing
the big picture.

~~~
yapcguy
That's a fair point, although he did hire that British guy to head up
retail... only to then fire him after just a few months. Let's see how he does
in 2014.

------
sbarre
The article talks about one of the risks being a "value-destroying takeover".

Is there anyone or anything out there that could even try this with Apple? Is
that even really a risk for them?

It would seem in their market that any competitor or threat to their business
would be spotted miles and years away..

~~~
Fomite
They're concerned about _Apple_ taking something over, not Apple being taken
over. With a massive cash reserve, it becomes easier to buy up interesting new
companies, and something like 80% of these destroy value.

~~~
gress
A concern notably not grounded in any evidence about how actually Apple
operates.

~~~
nitrogen
FingerWorks and PrimeSense are both examples of Apple buying technology
companies. FingerWorks stopped shipments when Apple bought them, limiting
FingerWorks technology only to Apple products. We've yet to see what they do
to PrimeSense.

~~~
gress
This precisely supports the point that Apple carefully avoids the kind of
value destroying acquisitions, that shareholders might need to be concerned
about.

In the case of fingerworks, it would seem to have been a fantastic act of
value amplification for Apple.

~~~
nitrogen
I suppose one could consider two types of value destruction. The kind that
would bother shareholders is the kind that buys a company for $1e9, then
writes it off as a loss when that company turns out to be worthless.
FingerWorks is not this kind.

The other kind, the kind that bothers consumers, is the kind that buys a
company to keep the technology away from competitors and open source projects.
FingerWorks definitely fits this description. I hope the same does not hold
for PrimeSense.

~~~
gress
The piece is about the concerns of shareholders, so this other kind of value
destruction is irrelevant in this context.

But even if it were relevant, it's still not value destruction because future
cash flows are incorporated into the sale price. I.e. Whoever is selling it
thinks they'll get more for it than if they operate it themselves.

In this case consumers simply aren't generating enough demand to support the
product - i.e. they aren't valuing it as highly as the acquirer does. So the
acquisition _creates_ value.

