The media is full of misconceptions about Apple Inc. (NASDAQ:AAPL)‘s $137 billion cash pile. Let me drill into these one-by-one.
Apple’s cash hurts shareholders
There’s a big concern that the market might be discounting Apple’s cash. There’re only two reasons why this might happen:
Management Waste: Investors believe management might squander investor capital on overpriced acquisitions, bad investments, or frivolous side projects. This doesn’t seem likely. Apple Inc. (NASDAQ:AAPL) has a great acquisition track record and remarkable ability to create shareholder value.
Poor Returns: The cash could be invested in securities that earn returns lower than the risk-free rate. Given that Apple’s cash balance is invested in exchange traded securities like T-Bills and commercial paper, this doesn’t seem probable either.
Another concern investors raise is that Apple’s large cash balance reduces shareholder returns. This is technically true. Greenbacks sitting in a vault earn less than 1%. But investors must keep in mind that holding cash also reduces Apple Inc. (NASDAQ:AAPL)’s risk. A large balance isn’t good or bad for shareholders, it’s neutral.
Apple should make a big acquisition
Every armchair CEO in the blogosphere is throwing around names about who Apple should acquire.
Jim Cramer has suggested Apple buy Netflix, Inc. (NASDAQ:NFLX). Such a deal would give Apple access to a valuable distribution platform and content for the rumored launched of the company’s iTV. Apple Inc. (NASDAQ:AAPL) could easily digest such a purchase because Netflix’s market capitalization is relatively small at $10 billion.
Big acquisitions have a long history of destroying shareholder value as they’re usually overpriced and only serve to satisfy the egos of executives.
There’re few examples of companies that have grown successfully through acquisitions Take Hewlett-Packard Company (NYSE:HPQ) for example. The company has blown billions of dollars in shareholder wealth on soured deals; $1.2 billion on Palm, $8.8 billion on Autonomy, $8.0 billion on Electronic Data Systems. Today, Hewlett-Packard has a $40 billion market capitalization, less than the $61 billion spent on acquisitions since 2001.
Apple Inc. (NASDAQ:AAPL)’s current strategy, in contrast, has been remarkably successful. The company buys small firms with great talent and puts them to work on Apple projects.
Apple should leverage up
There’s a perception on Wall Street that Apple isn’t properly capitalized. By tinkering with the balance sheet in an excel spreadsheet, pundits believe Apple could unlock billions of dollars.
Barclays PLC (ADR) (NYSE:BCS) recently proposed the company issue $50-$100 billion in debt to finance a big dividend or share buyback. By financing the company with debt, Apple Inc. (NASDAQ:AAPL) could reduce its cost of capital and create value for shareholders.