Apple blossoms with growing cash balance

By TODD BISHOP
Seattle Post-Intelligencer

The biggest cash pile in the technology industry has historically belonged to Microsoft Corp., but now it has some company, and it's a familiar name: Apple Inc.

Microsoft has reduced its cash balance to $26.3 billion through large stock buybacks, dividends and acquisitions. The balance was more than $64 billion less than four years ago.

Meanwhile, Apple's balance has been growing -- reaching $19.5 billion at last count -- as a result of the cash generated by its Mac and iPod lines. Less than four years ago, its stockpile was $5.5 billion.

The trends have implications for both companies. Cash translates into the ability to consider acquisitions and other potentially business-boosting deals. Apple has cited those types of possibilities when Wall Street analysts have asked about its plans for its cash. Microsoft had been planning to borrow money for the first time, before it withdrew its $44.6 billion Yahoo bid Saturday.

Keeping too much cash on the balance sheet can raise eyebrows among investors, who often want companies to reinvest the cash in the business -- where it holds the promise of a greater financial return -- or to return the money to shareholders through dividends or stock buybacks.

"Stock buyback programs and other forms of returning the cash are discussed with the board from time to time," said Peter Oppenheimer, Apple's chief financial officer, in a Jan. 22 earnings conference call. But Apple's current preference is to "maintain a strong balance sheet in order to preserve our flexibility to make strategic investments and/or acquisitions," he added.

Investors are now watching Apple's growing cash balance in much the same way they did Microsoft's a few years ago.

"From purely a financial standpoint I think they're overcapitalized," said analyst Andy Hargreaves, who covers Apple at Pacific Crest Securities in Portland. "You'd like to see them return that in one way or another, or put it to work."

Apple has historically built its business from the ground up, preferring smaller strategic acquisitions of technology and talent. If the company continues to follow that pattern, that means it's not likely to reduce its cash pile through a blockbuster deal.

"I don't really expect them to do anything with it in the near term," Hargreaves said. "I think that (Apple CEO) Steve Jobs' experience with this company and the cycles that it's been through has taught him to be very, very conservative, and save for the rainy day."

Microsoft's Bill Gates has traditionally taken a similar approach. But as the company's cash pile reached legendary proportions a few years ago, and it settled some of its most costly antitrust challenges, investors were pressuring Microsoft to do something with the cash.

In July 2004, the company announced plans to spend about $75 billion in cash -- including $32 billion in a special dividend, a $30 billion stock buyback, and a commitment to increase its regular dividend. The company continued to make regular stock buybacks in recent years.

One idea behind stock buybacks is to reduce the number of shares on the market. That, in turn, helps increase a company's key ratio of earnings per share.

But Microsoft's $44.6 billion bid for Yahoo cast the situation in a different light. The company's proposal funded the deal half in cash and half in stock.

Even at that, Microsoft said it would have needed to borrow an unspecified amount to finance the acquisition.

The situation changed Microsoft's approach to stock buybacks, at least temporarily.

In the quarter ended March 31, Microsoft bought back slightly more than $1 billion worth of its own stock -- compared with more than $6.7 billion repurchased during the same quarter a year ago. Microsoft finance chief Chris Liddell told analysts in an April 24 conference call that he wanted to "maintain the most amount of flexibility" for the Yahoo deal.

As a result, Microsoft's balance of cash and short-term investments rose for the first time in two years. Its $26.3 billion balance, as of March 31, was $5.3 billion more than it had on hand a quarter earlier.

Microsoft hasn't said how it will approach the cash issue now that it has walked away from the Yahoo bid, but any other Internet-related deal it would pursue would be unlikely to require so much capital.