Steve Jobs is a great entrepreneur, visionary, salesperson, negotiator, etc, but he's not a finance guy. Other than reinvesting in your business (of which there's a limit), Jobs wasn't very good at capital allocation. He asked Buffett for advise but didn't take the advise. Read this interesting article:
Having said that, it all depends on how you think Apple's stock will perform. If you think it's going to go up (ie undervalued), buy your own stock (ie buybacks) and keep it away from the stock market (ie retire them) if you think your own stock is going to go down, then continue keeping your 150 billion in the money market earning 1% per year (which is below inflation so you're actually losing purchasing power)
And you know this how?
Google bubble. Nothing to Apple.
Not in the slightest.
Yep. He’ll be asked to step down (and out) within the year.
EDIT: Ah, found it. http://bgr.com/2013/10/16/warren-buffett-apple-advice/
bravadu wrote: »
it all depends on how you think Apple's stock will perform. If you think it's going to go up (ie undervalued), buy your own stock (ie buybacks) and keep it away from the stock market (ie retire them) if you think your own stock is going to go down, then continue keeping your 150 billion in the money market earning 1% per year (which is below inflation so you're actually losing purchasing power)
I think Buffett was referring to Icahn's very aggressive $150B buyback suggestion and not the recent more-reasonable $50B one.
Icahn has already massively toned down his "suggestion" and made it a non-binding resolution on top of that. So it's far from the ugly fights that he does with other companies. He's been very respectful with Apple.
The $50B one is very manageable and thus not very risky. It ups Apple's current $100B capital return program by 50% to $150B.
Apple dividend is currently giving a $3.05 dividend per quarter or $12.20 a year or a 2.18% yield. If Apple buys back 10 million shares or $5.6B current market value, they immediately save themselves $122 million a year in dividend payments. That is already more than what they're earning for their "investments"
That $5.6B in my example disappears from Apple's bank account in the form of cash. It also disappears from Apple's market capitalization, so on paper, that might sounds bad, but there's now fewer shares outstanding and that's a good thing. However, Apple's business fundamentals remain the same and each remaining investor now has a bigger claim to Apple's business, so this move has created value for Apple's remaining investors who didn't sell out.
The reverse of buybacks is that Apple can issue 100 million new shares and deposit the proceeds of the share sale into their bank account. Repeat one thousand times for one gazillion dollars.
If they (Apple) don't retire the shares, they could resell them back onto the open market at a latter day I guess. It will be better for the remaining investors if they retired those shares.
But to retire or not to retire, heck anything is better than sitting on that pile of cash that is losing purchasing power (inflation is greater than interest earned)
If you are a strategic competitor of Apple's (or anyone really) you might start by making a list of all their possible actions. With a pile of money that big they can do virtually anything which makes it hard to plan against them.
Name me three things that Apple might do with $150B that it can't with "only" $100B.
Something you can do with $150b than you can't do with $100b, is make a $50b strategic acquisition and still have $100bn of unpredictability.
Like? Give me some names that wouldn't have significant anti-trust issues (decrease smartphone/computer competition). Apple has proven very disciplined with their money - they make more than MS or Google, but don't spend several billion on crap like Skype and Motorola. They really don't need to hold that much cash on hand.
Besides, Apple can fairly-easily raise billions from the debt market. It could raise $50B and still have a pretty low leverage ratio. I don't think it would need to, though.
The best way to predict what companies Apple might buy, is to look at what they have bought in the past (such as Authentec, Israeli chip/ssd firms, the recent Twitter stats firm) and assume they will do more of the same. They don't seem to acquire complete products and rebrand them like Microsoft, they seem to already have some idea of what they want to build and then go out and acquire the technologies.
The amount of money you need to hoard to become unpredictable depends on what you estimate the computing power of your opponent to be. If you think they can predict 8 moves ahead, you need enough money to do "virtually anything" 9 or more times, and you yourself need to think 9 moves ahead. In Silicon Valley your opponents will have a lot of computing power so you will need a lot of money.
Yeah, what can you buy with $500B that you can't with $400B? These hypotheticals either need to be specific or stop altogether. Cash is a drag on Apple's metrics and performance.
Apple isn't buying a carrier because this will alienate and turn the other carriers into enemies. Right now carriers are one of Apple's most-important customers. Like China Mobile.
Apple isn't buying Disney either because it will have a harder time getting new content from Disney's competitors. Sames goes for developers like Zynga, EA or Gameloft. Content is what makes your ecosystem good. Buying a large content provider is bad because it turns partners into competitors, and that's just bad.
Apple also shouldn't get Corning, Broadcom, Sharp or Qualcomm (suppliers). Antitrust concerns aside, those companies need to license a lot of intellectual property from other companies to produce parts. If Apple bought them, they would have to pay massively more for IPs. Those companies are better off staying independent.
Apple could buy Foxconn I guess, but that's opening up a can of worms and a potential PR nightmare.
I think holding $50B in cash is more than enough. Buy Sony and Broadcom for $35B combined? You can, but I would recommend against it. Apple should either buy companies that make its products better or make future products possible. Fortunately those companies are cheap and usually costing no more than a week of Apple's profits as Apple adds about $50B a year to their bank account. Apple can also comfortably raise another $50B from the debt markets if needed. Apple doesn't have a cash shortage problem.
A terrible plan that leaves open the possibility that if Apple's sales and profits fall like Zubaz, its shareholders could end up with zero.
I am an Apple fan and it has gone downhill before.