Financial Policy at Apple, 2013 (A)
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J U N E 1 9 , XXXXXXXXXX
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M I H I R A . D E S A I
E L I Z A B E T H A . M E Y E R
Financial Policy at Apple, 2013 (A)
On April 12th 2013, Tim Cook, the CEO of Apple, and Peter Oppenheimer, the company’s CFO,
came together for a meeting in their Cupertino, California office. They had been confronting
shareholder concerns over the level of cash Apple was holding and Apple’s second-quarter press
conference was less than two weeks away. Steve Jobs, the co-founder of Apple and its CEO from
1997 until 2011, had passed away only a year and a half prior and the pressure from stockholders to
continue innovating was very high. They were particularly concerned about the amount of cash that
Apple held, which amounted to $137 billion at Apple’s first quarter filing, especially as Apple’s stock
price plummeted from a high of just over $700 in September to around $420 in April (see Exhibit 1 for
Apple’s recent stock price.)1,2
David Einhorn, the president of Greenlight Capital, was fomenting the discontent of shareholders
y voicing his belief that Apple should return most of its $137 billion in cash to the shareholders
ather than let it sit unused. In particular, Einhorn had been pushing for a new class of prefe
ed
stock, which he du
ed “iPref,” that awarded holders $2 a year, or 50 cents per quarter.3 Einhorn’s
frustration with the matter had led him to sue Apple a few months prior for bundling a shareholder
vote that included a proposition to remove the company’s ability to issue prefe
ed stock (see Exhibit
2 for excerpts of Einhorn’s letter to the shareholders.)4 This suit was ultimately dropped in March
after Greenlight won an injunction and Apple withdrew the proposal.
Cook and Oppenheimer had to make a decision about how to react to these concerns. Should they
egin to return more cash to the shareholders? If so, how much and through what method? They
could issue a dividend, but were uncertain whether to issue a large special dividend or commit to one
over time. They could authorize a share repurchase using some or all of their cash. They could also
listen to Einhorn’s suggestion and issue prefe
ed stock to each cu
ent stockholder. On the other
hand, they could choose to keep their cash given the need to continue to invest in new technologies
and the uncertainties of their product markets. To further complicate this situation, they also had to
consider the fact that most of their cash was held overseas and could face a repatriation tax of up to
35% depending on the choice they made.5
For the exclusive use of D. Ghosh, 2020.
This document is authorized for use only by Devleena Ghosh in Behavioral Corporate Finance (Summer 2020) taught by DUCCIO MARTELLI, Universit?? degli Studi di Perugia from Jun 2020
to Aug 2020.
XXXXXXXXXXFinancial Policy at Apple, 2013 (A)
2
A History of Apple6
Apple Computer was founded on April 1st, 1976 by Steve Jobs and Steve Wozniak in the garage of
the former’s parents. Wozniak, an affable, soft-spoken man, would be the engineer and Jobs, the
visionary and businessman. While Wozniak was content to give away for free the design for what
would become the Apple I, Jobs had the idea to sell it to a local computer store. Within 30 days,
Apple Computers was nearly profitable. After seeing how plain and uninteresting the Apple I
looked in comparison to other computers at the Personal Computer Festival in 1976, Wozniak began
to design the Apple II. Over sixteen years with several different versions, nearly six million Apple II
computers were sold (see Exhibit 4 for a timeline of Apple releases.) Steve Jobs was restless,
however, as the computer was always seen as Wozniak’s creation, not his. Tempers began to flare,
especially as another man, Mike Markkula, had been chosen to become the next CEO of Apple in
1981 after Michael Scott, Apple’s first CEO, was moved to vice chairman.
Over the next several years, Apple began to struggle financially. Two new projects, the Apple III
and the Lisa, were losing money. While the Lisa was being developed, Steve Jobs was kicked off of
the team. Furious, he discovered a team developing a low-cost computer and decided to place
himself there. This computer would later become the Macintosh. In 1984, the Macintosh was
announced during the Super Bowl with a memorable commercial depicting a woman defying a “Big
Brother-esque” regime. By that evening, the commercial had gone viral, appearing on news
segments on all three networks and fifty local stations. While sales for the Macintosh started off
strong, they slowed significantly in the latter part of XXXXXXXXXXTensions grew high between Jobs and the
cu
ent CEO, John Sculley. Eventually, Jobs attempted to overthrow Sculley but was instead
emoved from his position. Jobs left Apple in 1985.
From the time Steve Jobs left Apple in 1985 until he returned in 1997, Apple produced many new
computers, most of which were derivations of the Macintosh. These were mostly unsuccessful. Jobs,
on the other hand, was enjoying the recent success of Pixar, which he had purchased in 1986 from
Lucasfilm. When Jobs stepped up as interim CEO in 1997, Apple was “less than ninety days from
eing insolvent.”7 The previous CEO, Gil Amelio, had been fired after Apple’s stock had plummeted
to a twelve-year low. As interim CEO, Jobs’ first goal was to prune the projects Apple was working
on as well as the teams working on them. Jobs ended up cutting 70% of the products and models
Apple had been working on at the time. He settled on having only four products: a consumer
desktop, consumer laptop, professional desktop and professional laptop. Apple lost $1.04 billion in
1997, the year before Jobs became interim CEO. A year later, they made a profit of $309 million. That
same year, the iMac, known for its colorful plastic casing, was released along with its professional
counterpart, the PowerMac G3. The iMac sold 800,000 units from August 1998, when it was released,
to the end of the year. Around 32% of these sales went to people who had never bought a computer
efore. Later that year, Jobs hired Tim Cook (who would later become CEO) as the new chief
operating officer. Cook was able to
ing Apple’s inventory down from one month’s worth to just six
days’ worth. He also cut production time in half. At this time, the board was starting to pressure
Jobs into becoming the CEO rather than just the interim (or as he called it, the iCEO.) In January
2000, it was announced that Jobs would officially become the CEO of Apple.
The next decade
ought many changes to both the personal computer industry and the world. In
2001, Apple unveiled the iPod, and while it certainly wasn’t the first MP3 player on the market, it was
the most user-friendly. Along with the iPod, Apple introduced iTunes, which was the only program
able to sync music between a computer and the iPod. At first, iTunes was only available on the Mac,
giving Apple a boost in sales. In 2003, Jobs announced iTunes for Windows, declaring it as “probably
the best Windows app ever written.”8 That same year, Apple unveiled the iTunes store where, for
For the exclusive use of D. Ghosh, 2020.
This document is authorized for use only by Devleena Ghosh in Behavioral Corporate Finance (Summer 2020) taught by DUCCIO MARTELLI, Universit?? degli Studi di Perugia from Jun 2020
to Aug 2020.
Financial Policy at Apple, 2013 (A XXXXXXXXXX
3
the first time, consumers could purchase digital versions of many of their favorite songs or albums in
one place. These songs could be immediately synced to their iPods. Over the next several years,
various versions of the iPod were released, some with huge storage capabilities, some designed
without screens. Around this time, Steve Jobs was diagnosed with pancreatic cancer. He kept this
news secret for quite some time, but underwent surgery in July 2004, appointing Tim Cook as his
temporary replacement while he was on medical leave. When he returned, he immediately
ought
his attention to the success of the iPod. Since it accounted for 45% of Apple’s revenue in 2005, it was
important that they stay at the cutting edge. “The device that can eat our lunch is the cell phone,” he
emarked.9 While at first they tried to just modify the iPod, the scroll wheel was too difficult to use to
make calls. Instead, they developed their well-known touch screen, which uses a technology called
multi-touch. The iPhone was a huge success, with 270,000 units sold in the first thirty hours alone.a,10
In 2008, Jobs’ cancer returned; when he attended the launch of the iPhone 3G in June