06 August, 2010

Apple's problem: Too much cash

Apple Inc Chief Financial Officer Peter Oppenheimer faces a dilemma that perhaps every finance chief wishes to have: obscene amounts of cash and nowhere to put it.

The iPhone, iPad, iPod and Mac computer maker has accumulated a cash pile that totals nearly $46 billion, the biggest cash hoard among U.S. tech companies and equivalent to one-fifth of Apple's market capitalization.

And yet, due to an ultra-conservative investment strategy and low interest rates, that cash is earning next to nothing for Apple, which rarely makes acquisitions and does not pay a regular dividend or buy back stock. Analysts say Apple's near-death experience in the 1990s helps explain why it likes to remain liquid by investing in safe but low-yielding U.S. Treasury and agency debt.

Oppenheimer's cautious approach dates from his time at Automatic Data Processing Inc, but Apple's conservatism is also driven by Chief Executive Steve Jobs.

Both Jobs, 55, and Oppenheimer, 47, subscribe to the Silicon Valley maxim that "only the paranoid survive," he said.

They remember the dark days when Apple was struggling to stay alive and had to lay off thousands to cut costs. When Oppenheimer joined the company in 1996 as its controller for the Americas, a series of bad management decisions had eroded profits and sent its share price diving to less than $5.

Things got so bad that one of the first things Jobs did when he returned to Apple was take a lifeline in the form of a $150 million investment from Microsoft Corp in 1997.

Although Apple is famous for innovation, research and development costs only account for 3 percent of revenue - far lower than at Microsoft and Cisco Systems Inc, due in part to Apple's narrow product portfolio.

Apple does not appear to pay especially high salaries, either. According to career website glassdoor.com, which relies on anonymous users sharing their salary data, an Apple software engineer earns around $100,000 per year, roughly the same as engineers at Google Inc.

While many top tech companies are awash in cash, unlike Apple, they tend to put excess cash to use. For example, Intel Corp and Microsoft pay dividends; Cisco and International Business Machines Corp buy back big chunks of stock; and Hewlett-Packard Co and Oracle Corp are serial acquirers.Apple makes few acquisitions because it develops products internally, and pays little for what it does buy.

Full article here


mark said...

When will this nonsense be put right?
'....the first things Jobs did when he returned to Apple was take a lifeline in the form of a $150 million investment from Microsoft Corp in 1997.'
Just not true, never was - and endlessly repeating it will not change the facts.
Apple had over $1.2B in cash when MS bought $150M in non voting stock and also promised to keep developing office for the Mac. MS were at the time fighting anti-trust allegations and the 'investment' was widely seen as a diversionary tactic to buy off Apple's involvement in the case.
Please, get your facts straight, you just look uninformed by repeating this which encourages anti-Apple nutters to believe MS saved Apple.
Other than that, I'm struggling to find a point to the post

James Katt said...

Apple has a lot of cash.
This is a GOOD THING.

Apple is an extremely focused company. More so than any other large corporation in the world.

This is why Apple succeeds which so few products.

The cash is a WEAPON it wields against other companies. Apple can Pre-Pay in CASH for its supplies and components. This is why it can get HUGE Bargains compared to other companies. This is why it can corner nearly all the world stock in smartphone screens and flash memory, etc. Loans and credit don't insure bargains and leverage. Cash is King.

The cash hoard also allows Apple to make a HUGE purchase if and when it wants to. It is also a HUGE Hedge against negative events. It has allowed Apple to invest in the recession. For example, Apple now has even more Apple Stores during the recession than before. It has allowed Apple to MAKE HUGE PROFITS DURING A RECESSION where other companies struggle.

50 Billion in cash is VERY LITTLE. One can easily run through it if one is not smart. For example, Apple's new datacenter in North Carolina cost more than $1 Billion. It will cost hundreds of millions or billions of dollars to run over the coming years.

Why burn a hole in your pocket when you are the most profitable company and almost largest company in the world?

Saving can be smart too. Apple is smart.

Anonymous said...

Well, they could buy Adobe. But they've made most of ADBE's product line obsolete already. They could buy Netflix or (maybe) VMWare (don't know WMWare's market cap). I trust Steve's judgment. Keeping it for emergencies doesn't hurt. Everybody's too leveraged these days. It's how the mortgage banks failed.