Opinion – How the times change. Several years ago, Dell was flying high and company founder Michael Dell predicted Apple heading into bankruptcy. Today Apple has more than four times Dell’s market cap, and a product lineup as well as profit margins that any IT company would kill for. Apple’s balance sheet reveals that Apple has been piling up its cash for some time now and cash and cash equivalents were about $19,448,000,000 as of March 29, 2008. You can’t tell us that there is no reason for that that much cash in a bank account
Even if you are bored by looking at financial data, Apple’s balance sheet and stock can provide for some interesting reading. The company’s stock is approaching its $202 high reached on December 31, 2007 and is trading around $185 at the time of this writing. It appears that mainly the excitement for the next iPhone is driving the stock performance, currently handing the company a market capitalization of about $163.5 billion.
When Steve Jobs returned to Apple in 1997, the company was bleeding money everywhere and was just a few months away from bankruptcy and total annihilation. There were few that believed that Jobs could save the troubled company he co-founded, let alone turn the company into the money making machine it is today. As we know today, Jobs and his strategy worked out and proved other executives such as Michael Dell wrong: Back in 1997, Dell was speaking in front of a crowd of several thousand IT executives and said: "What would I do? I'd shut [Apple] down and give the money back to the shareholders." Revenge is a dish best served cold.
Nine years later, Steve Jobs wrote in an email sent to Apple employees: "Team, it turned out that Michael Dell wasn't perfect at predicting the future. Based on today's stock market close, Apple is worth more than Dell. Stocks go up and down, and things may be different tomorrow, but I thought it was worth a moment of reflection today. Steve." Dell is currently valued at about $39.0 billion.
Not only is Apple's holding up well against continued recession indications, but the company also sits on a pile of cash. Although Microsoft has always been known as having the largest warchest in the IT industry, its current cash balance currently stands at $26.3 billion, a far cry from more than $64 billion less than four years ago. The software maker spent most of the cash on dividends, expensive acquisitions and huge stock buybacks. Had the $44.6 billion Yahoo acquisition offer gone through, Microsoft would have had to borrow money for the first time in its history.
During the same period of time, Apple's cash balance increased from $5.5 billion to $19.4 billion, with Macintosh PCs and iPods raking in most of the profits. Of course, Apple has not paid dividends in years nor has it indulged in an acquisition bonanza that would dry its cash.
A San Francisco Chronicle article echoes the generally accepted opinion that Apple's savings are for tough times such as a recession, increased competition, change in consumer behavior or simply lack of innovation on Apple's part. But some think the company may be deliberately fattening itself for an upcoming mega-acquisition that could be an industry game changer. Of course, Apple isn't talking much about its plans. When pressed by Wall Street analysts, the company vaguely hinted it may use the money for acquisitions or other high-profile deals, but that's all we know. In absence of any substantial information, the best thing we could do is take existing pieces of information and speculate about the bigger picture.
Let’s look at the big picture. Apple has largely relied on organic growth in the past and there have been very few acquisitions over the firm’s company history. Most recently, the company purchased processor developer PA Semi, which will not develop processors for Apple and is even unlikely to continue selling processors, due to government concerns. Apple is said to have an interest in PA Semi’s engineers, which may be true. But realistically, does it really matter? The purchase is insignificant from the view of financials as well as a corporate challenge. Apple may have a good reason to acquire PA Semi, but the outcome may not matter. Think about it this way: If the speculation about a possible new product drives the stock price a few dimes higher, it was a breakeven deal for Apple. And everyone is less concerned about Apple not spending some of its money.
In the end, Apple may not be looking into an acquisition at all, but if it does, its cash reserve puts some interesting opportunities within its reach.
We have heard about Sun ($11.65 billion market cap) that could elevate Apple’s enterprise and software business and perhaps even Sony ($47 billion) in its reach – in the end, Apple has been believed to be the next Sony anyway.
But let us throw one other option into the mix, which, we believe, may make a whole lot of sense: Yahoo. Apple so far has completely ignored online business opportunities, with the exception of its online store and a $99-a-year online service dubbed .Mac. If you look at Apple’s online portfolio, it may sound strange that a platform company (which includes software) has no competitive offering compete in search, online advertising or increasingly SaaS markets. Yahoo could deliver an enormous opportunity for Apple to promote online services, for example for its iPhone, and put the company instantly ahead of Microsoft in the online game.
Yahoo, on the other side, has seen its user base decline and is facing more and more pressure from Google and Microsoft. The corporate culture at Yahoo may not have been a great fit for Microsoft and a more emotional Apple theme may not only suit Yahoo better but may also be accepted by Yahoo’s employees much faster.
There is no doubt in our mind that Yahoo is ripe for an acquisition and it is vulnerable enough that someone will scoop the company up sooner or later. Google may not be able to and run into antitrust-issues and Microsoft is offended by Yahoo’s behavior. So why not Apple?
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