The Battle Over Cash and Its Implications: Dell and Apple
While Apple’s stock has fallen sharply in recent months, its fortunes seem far removed from those of Dell, which has struggled mightily for the past decade to regain its footing. Apple has ridden one innovation after another into a leading position across several huge product areas. Meanwhile, Dell has failed to reverse its fortunes, having spent billions on acquisitions. Apple remains one of the most valuable companies in the world with a market capitalization of over $450 billion. By contrast, Dell’s market cap is a mere $24 billion even after being bolstered by the buyout offer from Michael Dell and Silver Lake Partners.
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Nonetheless, these companies share a common problem. They are sitting on huge piles of cash with much of that cash sitting in foreign bank accounts. Apple has $145/share in cash or about 30% of its stock’s value, and Dell has about $6.40/share or 50% of its stock’s value. Unfortunately much of the cash is in the wrong place. If the companies want to return the cash to shareholders, they need to repatriate it and pay roughly 35% in taxes. If they want to reinvest the cash in the business, it needs to be transferred to jurisdictions where it can be productively deployed. Moreover in Apple’s case, $137 billion is a staggering amount to plowback into new initiatives and manufacturing plants. In Dell’s situation, the track record of deploying cash is abysmal. They’ve spent some $13 billion over the years to buy Perot Systems and a variety of storage companies without generating any value. It doesn’t inspire confidence.
So Michael Dell, founder of the computer manufacturer, and Steve Einhorn, founder of Greenlight Capital, came along with ideas about extracting cash from Dell and Apple, respectively. Mr. Dell wants to use the cash to finance his acquisition of the company, and not surprisingly Dell’s largest institutional investor, Southeastern Asset Management is putting up a fight. Interestingly, Dell’s board is now willing to repatriate the cash despite the tax hit to help Mr. Dell finance his purchase. As I wrote recently, I expect Mr. Dell to win the battle for the company after raising the acquisition price above the initial offer of $13.85 per share.
So when you boil down these two battles, they’re not about Apple’s IPads or Dell’s Latitude Series of laptops. This is about cash, and who gets it. I’d like to believe that this cash would be invested in the long-term best interest of investors, because it might fuel innovation and new products. However as you can from the table below, the people who will decide the battle over cash have investment horizons measured in fiscal quarters.
Meanwhile, Apple’s ownership remains much more evenly spread, and I would imagine the big banks, and broker dealers aren’t going to rock Apple’s boat. Thus, Mr. Einhorn’s proposal probably remains a long shot. You have to have some sympathy for Mr. Einhorn’s position. If Hewlett Packard, the graveyard for Compaq and host of mid-range computer companies, and Dell are any indications, big technology companies have not done a good job of reinvesting cash. They've squandered it on big-ticket acquisitions. While I’d prefer to see the cash well invested, it might as well go back to shareholders if Apple doesn’t have productive uses for it.
The battle for cash isn’t just confined to Apple and Dell. Hundreds of multinational corporations are sitting on cash and other assets, which is in the wrong place. Bain and Company has just issued an excellent report on the opportunities and pitfalls of productively of reinvesting this capital in our low interest rate environment. When investors chase cash in a low interest rate environment, the markets tend to form bubbles and gyrate wildly. The skirmishes at Apple and Dell don’t foster confidence.