There must have been a dip in the news about new products and management changes at Apple (AAPL). Most of the conversation about the company in the last several days has turned to Apple’s cash balance of $29 billion. Only a handful of American companies have that much money on hand. The fact that Apple does not do anything with it makes people, especially the company’s investors, unhappy. The cash sits in accounts which yield only a percentage point or two. What a waste.
There are some valuable lessons to Apple’s balance sheet management. The first is that the Apple board is smart and patient. Mergers and acquisitions are hard to make work at any company. Apple’s culture is insular. Trying to integrate outside products and people would be harder for Apple than almost any well-known technology company in the world. A great deal of that has to do with Apple’s obsession about secrecy which is a match for the 1,000-year-old Knights Hospitaller which furtively ruled parts of Europe and the Middle East for centuries.
Apple’s rejection of invention that comes from outside the firm and product development other than its own make it a company that probably will always create its consumer electronics, PCs, and whatever else it decides should bear the Apple brand .
Given all of that, Apple investors who own Apple’s stock do not have to worry that any cash will be squandered on acquisitions.
Apple shareholders do not like that the company will not send them any of the cash as dividends or stock buybacks. The practice of hoarding money at big public companies is decades old. Green mailers were able to grab the money from some of these firms when the practice was prevalent twenty-five years ago. Raiders like Carl Icahn still take large positions in public firms hoping to get them to distribute their cash or auction off their assets with the proceeds going to shareholders. Investment bankers helped boards build elaborate defenses against outside investors who want to take the cash from corporate balance sheets. Most of these, particularly “poison pill” provisions, were adopted by a number of companies.
Apple does not need any of these defenses. No one will be able to pressure management with a threat of voting out the board. The company has simply been too successful to be a target for potential investors who would like to force a distribution of Apple’s cash. Apple is Apple because of its management. Any threat to that could damage the firm beyond repair.
Investors who believe that Apple owes them some of the company’s cash because they own a piece of Apple won’t be getting any satisfaction. The Apple board has no legal or ethical obligation to do anything with the money to satisfy shareholders. Apple can hold onto its cash forever.
When management is considered infallible investors win if it remains that way. A nearly-universal impression that a company’s executives never make mistakes may be the most important sign that it continues to post amazing results. In exchange, Apple can tell shareholders that what the company does with its cash is none of their business.
Douglas A. McIntyre