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04-29-2013, 04:34 AM #1Is Apple the Next Dell?
Apple’s latest earnings report demonstrates a shift in its locus of innovation — from new products, to placating Wall Street. And its imminent debt offering is just a part of what makes me wonder whether Apple could become the next Dell.
On April 23, Apple posted results that were slightly better than expected. Its revenues were up 11% and its net income fell 18%. But the real action was in how much cash Apple was willing to pay out to shareholders — $100 billion in stock buybacks by 2015 and a 15% boost to Apple’s dividend.
While Apple is spending $5 billion of its cash hoard on Steve Jobs’ last great innovation — a new Cupertino headquarters, CEO Tim Cook was raving about the “exciting” products that Apple has in the works. Unfortunately, this brings to mind the idea of a corporate edifice complex. That’s where a successful company builds a monument to its greatness just as it is losing touch with the realities of its market.
Fortunately, next generation upstarts come along to pick up the pieces. For example, according to Dalton Caldwell, as it grew, Google moved into an office “originally built by once high-flying SGI” and earlier in its history Facebook moved into the former Palo Alto headquarters of Sun Microsystems (now part of Oracle).
Before getting into the details of Apple’s debt deal, it’s worth pointing out that the evidence on share buybacks is grim when it comes to shareholders. Sure, the buybacks return money to shareholders and reduce the number of shares outstanding — making it easier to meet earnings per share targets.
But they don’t do any favors to shareholders. As I wrote in October 2010, roughly 66% of stock buybacks in 2000 through 2009 lost money for shareholders, according to Michael Gumport of research firm MG Holdings. Gumport analyzed 280 companies during the period — finding that Dell was among the worst performers — losing $17 billion on stock buybacks.
Is Apple going the way of Dell? Dell is trying to go private, a move that would add to its debt and take it out of the public eye. Apple is going part of the way — adding as much as $55 billion in debt to its balance sheet. According to the Wall Street Journal, Apple wants to do its part to add to the U.S. deficit by not paying taxes on cash that it holds overseas.
Issuing Apple’s first debt — to be AA-plus rated — would be a way to dodge taxes on repatriated cash. According to the Journal, “Despite its huge cash stockpile, Apple plans to issue debt to help fund dividend payments and stock buybacks in part because much of its cash is overseas. Raising money in the debt market would help Apple avoid the big tax bill that would come from bringing the cash back to the U.S.”