Yesterday, there was a bit of a hub-bub about Apple’s enormous $137 billion cash hoard, after David Einhorn, the head of Greenlight Capital, sued Apple over a plan to discard preferred stock and pressed Apple to give a significant chunk of the cash hoard directly to investors. It was such a big deal that Apple felt as if it were forced to respond.
Is there a good reason for Apple to be keeping $137 billion in the bank? Yup, and if you want to know why, all you have to do is look at Dell.
There was a time not that long ago when Dell was at the top of the world, and Dell’s founder and CEO was saying that Apple should close up shop and return all of its money to investors. Just 15 years later? Dell is an afterthought in the PC market, and is trying to make itself a private company again to save themselves from the very stockholders who have helped drive the company into the ground.
As a fantastic post by Barry Ritholtz over at The Big Picture makes clear, what happened to Dell is a perfect reason why Apple should hold on to as much cash as it can, while it can.
If you want to know why Apple is holding onto all that money (aside from obvious tax considerations), just look at Dell. It is a cautionary tale than any technology company can miss the next shifting tech trend and quickly become irrelevant. Bang, you are the next Maytag. Even Microsoft’s history offers a foreboding look at using special dividends as a salve to investors concerned only with their quarterly P&L (and personal compensation via 2 & 20 fee structures).
David Einhorn is a great investor (and a nice guy), but he joined the Apple party somewhat late, and suffered a setback last year with the rest of shareholders once the law of big numbers set in. He is now suing the company because they have too much cash…
Technology is a fast moving sector of the economy, where trends shift quickly and alliances change overnight. Having a cash hoard gives Apple maximum flexibility to deal with this for their future.
In other words, Einhorn and his compatriots bought Apple stock at $700, thinking it would hit $1000. When the market turned against AAPL, he decided to sue Apple to get his money back directly out of their cash holdings. Bad form.
To investors like Einhorn and Wall Street at large who just don’t get Apple, Ritholtz suggests this response:
Sorry if after 30 years, changing the dynamic in no less than 6 industries, creating the biggest technology firm in the world and briefly, the biggest company of any sort on the planet, we had a bad couple of quarters. That was inevitable.
Couldn’t have said it better myself. Make sure to read the whole post.