Apple (AAPL) has been accumulating lots of cash lately, thanks to the enormous profits it reaps from the sales of iPads and iPhones. According to new data, the consumer tech giant has amassed a total of $25.6 billion in cash and short-term investments. And if you were to factor in longer-term holdings, that figure would swell to $51 billion, one analyst says.

What's the best way for it to spend that money? If the Apple board is doing its job, it will use some of that to find a replacement for Steve Jobs, the world's greatest CEO when it comes to designing, building and selling innovative products that transform large, previously moribund industries.

As talented as Jobs is, he's also human, which means that when he is no longer in charge, Apple will probably go back to being what it was under his predecessor, John Sculley: a company that limps along with old products but struggles to innovate. Someone as good as Jobs is might be running another company now, and one way to hire that person would be to buy that company -- as Apple did when it rehired Jobs by acquiring his post-Apple firm, NeXT.

Which company would that be? There isn't one, because there is no one out there who can fill that turtleneck. Which makes me think: Maybe the board should just pay a large portion of that $25.6 billion worth of cash to shareholders.

What Makes a Good Acquisition

To analyze acquisitions, it helps to have a way to compare them. Since most mergers fail, boards should make sure they don't slam into any of the four icebergs that typically sink such deals after they occur: an unprofitable industry, an uncompetitive set of combined skills, overpaying, and the inability to integrate. To that end, here are four tests which any acquisition should pass:
  1. Industry Attractiveness: Does the industry the acquired firm is in have high profit potential?
  2. Better Off: Will the combined companies be able to capture a significant share of that industry due to their combined skills?
  3. Integration: Can the two companies merge their organizations smoothly so the deal is seamless to customers?
  4. Price: Is what the buyer pays for the target low enough that shareholders will get a return on the investment?
Several companies have been floated as a possible purchases to sop up some of Apple's $25.6 billion cash hoard. Here are my evaluations of each:

  • Facebook. AllThingsDigital suggested this possibility. But at an estimated price of $35 billion to $40 billion, such a deal -- --would fail the price and the better off tests. Apple has nothing useful to add to Facebook, so there's no realistic scenario in which the combined companies could generate enough additional profit beyond what Facebook can earn on its own to justify paying that much. Apple doesn't need to spend $40 billion to make Facebook's 500 million users aware of iTunes and its other products.
  • Netflix (NFLX). DealBook mentioned this idea. At an estimated price of $10 billion (assuming a premium over its current $7.8 billion market capitalization), such a deal would also fail the price and the better off tests. Netflix is trading at a P/E of 61 and its earnings are forecast to grow at slightly more than half that rate, 33%, so the stock is already overpriced. And, as with Facebook, there is nothing obvious that Apple could offer that would add to Netflix's DVD rental or online streaming businesses. If Apple wanted to create an iVideo store, it wouldn't need to buy Netflix to do it.
  • Electronic Arts (ERTS). At an estimated price of $5 billion -- the current market value of this money-losing video game company -- such a deal -- again suggested by DealBook -- would fail the industry attractiveness, price and the better off tests. The multimedia and graphics arts software industry has a five-year average return on equity of 0.6% (way below the S&P 500 average of 16.3%). Apple has nothing to add to Electronic Arts, meaning there's no realistic scenario under which this money-losing company would recoup the $5 billion it would take to acquire it. If Apple wants to get into the video game business, it should hire some engineers and design its own gaming system.
Apple As a Dividend Play?

Apple generates more cash than it can profitably reinvest. It averages about $1 billion in capital expenditures every quarter and still manages to add $1 billion a quarter to its cash and short-term investments. I propose that Apple shareholders would be better off if its board declared a $20 billion one-time dividend and then paid out $1 billion in dividends regularly every quarter.

Would investors lose interest in Apple if that dividend payment was made? I think it depends on whether Apple can continue to invent hit products. As long as it does that, investors will get a double benefit from owning Apple stock -- income and growth. It may be boring, but unless Apple can find another company to buy whose CEO rivals Steve Jobs for creativity, it makes more economic sense than throwing away $40 billion to buy Facebook.

Increase your money and finance knowledge from home

What is Inflation?

Why do prices go up?

View Course »

Economics 101

Intro to economics. But fun.

View Course »

Add a Comment

*0 / 3000 Character Maximum


Filter by:

I have an idea. Why doesn't Apple open a factory in the United States?

October 25 2010 at 12:28 AM Report abuse rate up rate down Reply

I need some money!

October 24 2010 at 11:19 PM Report abuse rate up rate down Reply

What to do with Apple cash? 1. Pay a decent dividend. 2. R&D to surpass your competition. 3. Lower the prices of your product/services to beat competition. 4. Plan to put Gates in perspective as only one major innovator. 5. Don't do what Mrs. Gates is doing and save 4 million babies in a culture that has no plan/history of wanting them or plans to support them. 6. Revolutionize your company into the number one. 7. Develope an internal audit/watch system to spot theft/fraud and corporate corruption. 8. Develope the newest and best anti-internet hacking service and offer your developed service to the US government. 9. Become the newly organized company of the 21st century. 10. Keep Jobs well and healthy at the helm.

October 24 2010 at 6:58 PM Report abuse rate up rate down Reply

Mr Cohan is an idiot. Steve Jobs is essentially irreplaceable. One possible choice might be Allan Mullaly, but his expertise is not computers and that is part of Jobs'strength, he understands the tech and he is an excellent administrator. I would much prefer the acquisition of another company, Netflix would rock, that is another very well run enterprise. I am a very satisfied Apple shareholder by the way, having purchased quite a bit of the stock in 2002 at about 13 dollars per. You go Steve, thanks a lot.

October 24 2010 at 5:30 PM Report abuse +1 rate up rate down Reply

sorry I like to know how much they pay in taxes

October 24 2010 at 4:13 PM Report abuse -1 rate up rate down Reply

I like to know are they in the US or in a country that don't taxes. I like to know how must taxes they pay.

October 24 2010 at 3:42 PM Report abuse -1 rate up rate down Reply
1 reply to jeff's comment

its none of your business

October 24 2010 at 8:58 PM Report abuse rate up rate down Reply

Haiti-Cholera outbreak

October 24 2010 at 3:20 PM Report abuse +2 rate up rate down Reply

Haiti-Cholera outbreak

October 24 2010 at 3:20 PM Report abuse +1 rate up rate down Reply

Haiti-Cholera outbreak

October 24 2010 at 3:20 PM Report abuse +1 rate up rate down Reply

Hiati-Cholera outbreak

October 24 2010 at 3:20 PM Report abuse +1 rate up rate down Reply