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Is Apple secretly trying to go private?
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I’ve reflected on this for almost a year, while watching the cash hoard grow in a low-interest account. Might Apple be working to amass enough cash to repurchase outstanding shares and go private? Is such a thing even possible?
Apple already seems to operate like a private company, with their well known secrecy. Given their historical indifference to share price, they conform to the bare essentials of disclosure required of a public company. With “conservative guidance” they retain the illusion of preserving shareholder value while essentially providing no information at all, as they “refuse to comment about unannounced products”.
Even if they wait for an inevitable dip, the run-up during any buyback would be enormous. So how much cash would they need? Would they do it if they could?
(Not suggesting that Apple *should* do this. Just thinking outloud.)
[ Edited: 14 November 2009 08:52 PM by rezonate ]Signature
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DawnTreader
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It’s unrealistic for Apple to go private. Even with over $30 billion in cash and equivalents the market cap (as of today) is over $180 billion and using all of that cash as leverage would only repurchase about 1/6th of the company. There’s no way management could reasonably expect to line up the financing and there isn’t any need for restructuring activity to be done in the dark to recapture lost shareholder value.
The $30 billion in cash and equivalents provides for ample liquidity during a period of aggressive retail store expansion, big investments(s) in data centers, continued R&D investments and the prospects of more acquisitions down the pike.
Keep in mind the high cash position provides surety to risk-averse institutions that are potential product customers (governments & government agencies, school districts, large enterprises, etc.) the company has staying power even if growth hits the skids temporarily. Apple may soon move further from the norm in designing its own chips. The move is a risk with a high potential reward. Having cash in the bank provides institution-sized customers with the confidence they aren’t investing in a risky sole-supplier relationship due to Apple’s ability to stand long-term behind its products.
As interest rates right themselves following this era or artificially low rates, Apple will reap handsome rewards in terms of an increase in returns and a boost to eps.
The high cash position is also a needed contrast to the lease obligations being incurred on the retail stores. Those lease obligations are quite high although retail margins on products sold is covering much of the tab.
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DawnTreader
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Apple already seems to operate like a private company, with their well known secrecy. Given their historical indifference to share price, they conform to the bare essentials of disclosure required of a public company. With “conservative guidance” they retain the illusion of preserving shareholder value while essentially providing no information at all, as they “refuse to comment about unannounced products”.
In my view Apple’s financial disclosures are adequate and meet the standards of disclosure required by law. Due to Apple’s unique position (pre-announcement of new products - or even rumors of new products famously skewing demand), it makes sense for the company to keep quiet about unannounced products.
There’s plenty of information disclosed in the companion SEC filings. I really see little that’s kept private relative to competing firms in the company’s various product segments.
We pretty much know the planned release dates of iPhone refreshes, the schedule for the release of new commercial versions of Mac OS X as soon as the release dates are determined, we can expect at least an annual refresh of the iPod line heading into the Christmas season and a refresh of the laptop line ahead of the back-to-school buying.
As for new product segments, I can understand Apple’s hesitance in pre-announcing an Apple tablet. Why spill the beans now? There’s little to gain for Apple and much to gain for competitors desiring to prepare knockoffs to be released around the same time.
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As DT says $180 billion cap makes it improbable for going private. Even if they could then SJ would have a different set of masters. Whilst public there is no controlling shareholder so SJ runs it like a fiefdom. As for the cash hoard which will approach $40 billion in early 2010 it remains a huge mystery to me. I am glad that Apple is not in the M&A game as the assimilation of large companies takes time and tends to shift a company’s culture. It other words I think it slows them down. But as the biggest purchase in recent memory is around $300 million (PA Semi) what the hell is all that cash doing there at <2%>? I cannot understand why Apple’s board would not buy back stock this past year when they knew they were performing above par and the stock was tanking all the way down to $78. So they had inside information ( how sales were going) and the stock was at fire sale prices. Sorry but I think they boobed here and Apple does not seem wrong footed often.
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Good discussion. Yes, a year ago when the market cap was $72 bil my idea made more sense. It obviously didn’t stay there - thankfully! To me it does seem like Apple operates as a private company. Just wondering out loud what such a world would be like. No AFB, for one. :(
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sleepygeek
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There’s a tendency to assume that the board has a duty to maximise share price for those shareholders who are currently selling their stock. But surely it is to maximise the value of the entire business for the collective shareholders who are not selling their stock (to whom the immediate stock price is “irrelevant”). Buying back stock reduces the value of the business (even though it increases the per-share value of the business), and only truly makes sense when the company can see no way to grow.
The cash is there as a “weapon of last resort to change the world”. It would enable Apple to buy mobile bandwidth licences, or to add banking services to integrate with its retailing and mobile services. The fact that the cash is there makes it easier for Apple to strike favorable deals with incumbent big players in such services. It may eventually be needed to properly restructure the movie & TV businesses, who are so keen to cling to what they had.
[ Edited: 15 November 2009 01:39 PM by sleepygeek ] -
There’s a tendency to assume that the board has a duty to maximise share price for those shareholders who are currently selling their stock. But surely it is to maximise the value of the entire business for the collective shareholders who are not selling their stock (to whom the immediate stock price is “irrelevant”). Buying back stock reduces the value of the business (even though it increases the per-share value of the business), and only truly makes sense when the company can see no way to grow.
The cash is there as a “weapon of last resort to change the world”. It would enable Apple to buy mobile bandwidth licences, or to add banking services to integrate with its retailing and mobile services. The fact that the cash is there makes it easier for Apple to strike favorable deals with incumbent big players in such services. It may eventually be needed to properly restructure the movie & TV businesses, who are so ken to cling to what they had.
Excellent points. And as Apple has shown it is very farsighted and could be saving for something big. But with the stock options to all employees and directors the stockholders are getting diluted every year. Just having a stock buyback announced might help protect the average stockholder from the wild swings perpetrated by Hedge funds, dark pools etc. The threat to naked shorters might make them look elsewhere. Like home security service the sign on the door is often enough for a would be transgressor to move on to another victim. Also having the plan does not mean that the corporation has to act on it
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sleepygeek
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I’d be in favour of an intended limit being declared on stock dilution (1 billion shares?) and a buy back programme being authorised to restrain dilution and frighten away shorters a little. But the morality of exercising options in parallel with stock buybacks ( as practised by, for example Dell and Microsoft) is highly questionable. Shareholders want the reward of stock options to reflect long term investor value created, not short term manipulation of the share price or the percentage of the business that each option represents.
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sleepygeek
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Returning to the original thought, can anyone see any advantage for Apple in going private? I could see it if the management were rich enough to finance it themselves, but surely the cash pile gives SJ more freedom than having a private owner, and a private buyer would surely be wanting to take the cash as part of the deal.
Perhaps we should take a Warren Buffet attitude to it: “short the stock as much as you want” and “the stock’s gone down? Good, I can get more for each extra dollar I invest.” Because Apple isn’t beholden to the market to underwrite borrowing, it can operate unimpeded right down to a stock price of zero.
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DawnTreader
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Returning to the original thought, can anyone see any advantage for Apple in going private? I could see it if the management were rich enough to finance it themselves, but surely the cash pile gives SJ more freedom than having a private owner, and a private buyer would surely be wanting to take the cash as part of the deal.
Perhaps we should take a Warren Buffet attitude to it: “short the stock as much as you want” and “the stock’s gone down? Good, I can get more for each extra dollar I invest.” Because Apple isn’t beholden to the market to underwrite borrowing, it can operate unimpeded right down to a stock price of zero.
The advantage of going private IMHO is when there is unrealized value that needs to be unlocked through cost cutting and restructuring that’s best done outside the glare of 90-day public reporting. Because Apple has probably three years of strong revenue and earnings growth ahead there isn’t a compelling reason to take the equity ownership off the public docket. In other words there’s nothing to be gained from a highly leveraged buyout of a company with a market cap of $180 billion because there’s little that can be done to financial reward the owners from such an action and the resources that would be needed to transition the firm from public to private would be counter productive to growth.
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DawnTreader
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The cash is there as a “weapon of last resort to change the world”. It would enable Apple to buy mobile bandwidth licences, or to add banking services to integrate with its retailing and mobile services. The fact that the cash is there makes it easier for Apple to strike favorable deals with incumbent big players in such services. It may eventually be needed to properly restructure the movie & TV businesses, who are so keen to cling to what they had.
I could see Apple acquiring or chartering its own back to handle its own transaction processing and a portion of the cash would provide the liquidity needed to fulfill regulatory requirements. Further, a couple/few medium-sized acquisitions over the next few years aren’t out of the question as Apple seeks to acquire IP and other assets to fuel product development and growth.
Indications are Apple is about to begin production of chips based on in-house designs. That’s a risk and the cash buttresses the company’s position in the market and assures potential product buyers of the company’s staying power in the market.
Additionally, considering the way Apple can consume much of the world’s supply of particular components, cash is needed at times to finance needed production capacity with suppliers.
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Cash hoard belongs to Apple shareholders. So, Apple management can’t use cash hoard to buy out shareholders.
So far, Apple has managed to obtain very good component price by pre-paying for them in cash. Other than possible big IP and business acquisition, one possible use of cash is to acquire content. Many of Apple products depend on content providers to cooperate. If content providers gang up against Apple, Apple can make hostile bid for these content providers.
Don’t forget, internal cash cost less than those raised through external financing. Also, sleepygeek’s point that Apple should maximize shareholders’ wealth for those shareholders who are not selling not for those who want to sell now. Lastly, repurchasing stocks is very inefficient use of cash.
SNIPUS - I believe Apple no longer issue employee stock options. Whatever stock options issued from the past should be gone by 2015. Hence, dilution of common shares are minimal.
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Cash hoard belongs to Apple shareholders. So, Apple management can’t use cash hoard to buy out shareholders.
So far, Apple has managed to obtain very good component price by pre-paying for them in cash. Other than possible big IP and business acquisition, one possible use of cash is to acquire content. Many of Apple products depend on content providers to cooperate. If content providers gang up against Apple, Apple can make hostile bid for these content providers.
Don’t forget, internal cash cost less than those raised through external financing. Also, sleepygeek’s point that Apple should maximize shareholders’ wealth for those shareholders who are not selling not for those who want to sell now. Lastly, repurchasing stocks is very inefficient use of cash.
SNIPUS - I believe Apple no longer issue employee stock options. Whatever stock options issued from the past should be gone by 2015. Hence, dilution of common shares are minimal.
Mace when a company gets cash rich it attracts takeover speculation and the cash is used to take over the target. This is done all the time.
I am surprised that Apple is no longer issuing stock options. Is this a recent decision? Does it apply to all Apple employees including officers?
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... Mace when a company gets cash rich it attracts takeover speculation and the cash is used to take over the target. This is done all the time ...
With cash hoard of $30B, it means any suitors paying $180B for Apple is actually paying $150B for it. If Apple has given shareholders the cash hoard, market cap would drop to $150B. So, suitors would still pay $150B.
A cash strapped business with overvalued stock price loves to take over a cash rich business with undervalued stock price with an all-stock offer. This type of situation is not using cash hoard to take over a business. Cash hoard belongs to the shareholders.
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SNIPUS,
Extracted from the latest SEC filings:
“Restricted Stock Units
Historically, the Company used equity awards in the form of stock options as one of the means for recruiting and retaining highly skilled talent. In conjunction with the Company?s 2009 equity compensation program changes, it began issuing primarily RSUs rather than stock options for eligible employees as the primary type of long-term equity-based award.”Signature
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SNIPUS,
Refer to this page. The number of options granted dropped from 14 mil in 2006 to 234k in 2009. According to Apple’s filings, expected life of 2009’s stock options is 4.54 years. Since this is probably the last batch of options, we can expect all options would expire by 2015.
Note also that the total number of RSUs + options outstanding has declined from 53 mil in 2006 to 34 mil in 2009. Hence, dilution of shares have declined over the year.
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