People invest money in a business in order to take risk and to get a return beyond what they could get by just keeping it under the mattress or even depositing it in a savings account. While it might be important for companies to have large amounts of cash on their balance sheet, it is always kept for strategic investing purposes – like making an acquisition, or investing in new lines of business, major expansions etc. If all that an investor aspires from his investment is to get an interest rate, he/she could invest in a CD.

In the case of Apple, it is sitting on a ginormous stash of cash valued at 75 billion dollars. The “trouble” for Apple is that cash balance, in all likelihood, will spike further in the days, weeks, and quarters to come. For a company growing as fast as Apple, I do not see it investing that money in to organic expansion plans.

Secret to Apple’s success in recent years is its sharp focus on doing only a few things, and doing them extremely well. Apple has proven over the last few years that its new product lines, instead of being radically different from the existing ones, nicely compliment the existing ones. Apple has managed to create a whole array of products and product lines that work well as a complete ecosystem. R&D is not cheap, yet a new product line like the iPad could be created from the ground up with a really tiny fraction of that 75 billion dollars. So what is Apple to do with all that growing stash of cash?

It could do one of two things or a combination of the two, and, either way, for Apple, it will be a break from its past. So what are these two things? First, Apple could offer a large one time dividend (a la Microsoft in 2003) to shareholders, followed by regular quarterly dividends. Even though Apple is sitting on large piles of cash on its balance sheet, it will be under no pressure, at least not in the immediate future, to do this – for the simple reason that Investors are happy with the returns they are getting, despite Apple’s “inability” to reinvest that money.

That leads us to the second option in front of the mercurial gang from Cupertino. It could make strategic acquisition in the technology space, and there are a lot of attractive players in this space. However obvious this option may be to any other company, it is far from obvious for Apple to do such a thing. Apple has achieved all that growth without making any large acquisition, and I believe this has been a key to the success of Apple as a company – going back to my point about products complimenting each other and working well as one single ecosystem. Besides, acquiring and integrating another large organization is a risky, and tedious process. For a company that nurtures a special employee and customer culture, integrating an established alien work culture would be tricky, to say the least.

Let us just speculate for a moment that if Apple, indeed, were to acquire another company, which one should it be?

Before we answer that question, let us break down the Apple ecosystem for a moment –  one could break it down into 3 pieces – Mobile, Desktop, and cloud. In the mobile space they have the iPods, iPhones, iPads & iOS; in the desktop (including laptop), they have the MacOS books and cubes; and in the cloud they have the music, video, books etc. Then, of course, there is the Apple TV, which could, in the future, lead to a successful home entertainment console that, in addition to bringing multimedia into living rooms, could bring a lot of popular gaming. Apple also has its own browser, Safari, across all these platforms. Apple is gaining momentum and market share against competition in most of these product lines. If there is a slight weakness in their armor, it is in the cloud, especially communication, sharing, and social. Ping has not exactly been a rip-roaring success. More over, biggest success stories in the cloud/social space are not exactly cozy with Apple – Google and Facebook with its close ties to Microsoft.

First and most obvious candidate for potential acquisition, I will say, is Twitter. It is very successful, not quite as large as Facebook, and has not aligned itself with any other behemoth in the, increasingly, tripolar technology industry. Apple could easily digest this acquisition. Besides, iOS5 comes with Twitter integrated into the OS. They could easily integrate Twitter into iTunes, to iCloud, and into the Safari browser itself.

A more risky acquisition would be Yahoo.  Yahoo clearly is a company in decline, yet it has a lot of assets in the cloud that could be valuable to a company like Apple which is battling it out with other giants like Microsoft and Google. Yahoo has a few popular internet properties in news, finance, movies, email etc. Yahoo was once involved in a search engine project code named Panama, which they later canned in favor of a partnership with Bing. Apple could even breathe some new life into the search effort with Yahoo. Apple already has Safari browser that could be already collecting a lot of data valuable to search engine technology. Yahoo Search could become the default search across all Apple devices, and Yahoo Maps could become the default Map/Local application across those same devices. The biggest challenge for Apple, if they ever end up acquiring Yahoo, will be integrating a company that is on the fast elevator down on the track to oblivion, a company that lacks excitement, and (from what I have heard from former Yahoos) a company that has a lethargic culture. A lot of heads will need to roll to transform Yahoo culture into a winning culture that is Apple.

The “trouble” for Apple is the cash acquisition costs of these companies are likely to be replenished in the balance sheet in a couple of quarters. At the same time, a bad acquisition could cost the company dearly, not just the investment but the impact that a rotten apple could have on the barrel full of excellent ones.

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6 Thoughts on “Apple’s Enviable “Troubles”

  1. George Attokaran on July 22, 2011 at 4:04 AM said:

    Well written, Subhi. Apple at this pace will become the most valued company in history. Actually, I am quite surprised at the way the stock is going, as if there is no ceiling.n

  2. Rajesh R Shenoy on July 22, 2011 at 7:02 AM said:

    Excellent article. However a couple of thoughts:n1. The movement of Apple in the recent years have been from personal entertainment to business and by piling up technology on the former. Ipod to Ipod touch to Iphone to Ipad. Its more of adding feature and gaining more fence sitters. At the same time eating the share from different tech competitors. (nokias, MS, Dells, sonys of the world had been hit). The trend, if they continue, will see a “Icomp” in the near future. A true comp with app based model, rather than the traditional model. All they need to add is more powerful business apps (if they already doesn’t have it). The cloud will add to the misery (of others).u00a0nn2. From a financial stand point, if a company sits on huge pile of cash, it can do one or a mix of:na, If it gives the cash as special dividend, Its reaching the end of the road in terms of growth and the cash is not required. This can send the stocks plummettingnb, The cash cows can generate enough cash and they have a well defined plan for long terms market development and hence will hold on to its kitty. The company stocks grow, because of market imperfections (read, nobody has an idea of what the hell is happening)nc, Buy out companies: for growth or killing competition. (In this case, Apple, who doesn’t think about competition – or pretend they don’t – can’t do the latter. Else that’s anu00a0acknowledgement)nu00a0n3. Don’t forget Steve’s love for media. I wouldn’t be surprised if Apple plans to buy some media company. A big one at that.u00a0

  3. Rajesh R Shenoy on July 22, 2011 at 7:02 AM said:

    Excellent article. However a couple of thoughts:n1. The movement of Apple in the recent years have been from personal entertainment to business and by piling up technology on the former. Ipod to Ipod touch to Iphone to Ipad. Its more of adding feature and gaining more fence sitters. At the same time eating the share from different tech competitors. (nokias, MS, Dells, sonys of the world had been hit). The trend, if they continue, will see a “Icomp” in the near future. A true comp with app based model, rather than the traditional model. All they need to add is more powerful business apps (if they already doesn’t have it). The cloud will add to the misery (of others).u00a0nn2. From a financial stand point, if a company sits on huge pile of cash, it can do one or a mix of:na, If it gives the cash as special dividend, Its reaching the end of the road in terms of growth and the cash is not required. This can send the stocks plummettingnb, The cash cows can generate enough cash and they have a well defined plan for long terms market development and hence will hold on to its kitty. The company stocks grow, because of market imperfections (read, nobody has an idea of what the hell is happening)nc, Buy out companies: for growth or killing competition. (In this case, Apple, who doesn’t think about competition – or pretend they don’t – can’t do the latter. Else that’s anu00a0acknowledgement)nu00a0n3. Don’t forget Steve’s love for media. I wouldn’t be surprised if Apple plans to buy some media company. A big one at that.u00a0

  4. Subhi on July 22, 2011 at 7:51 AM said:

    Apple is closer to the top than it is to the bottom(which was probably more than 10000% ago). But it has a lot of room for growth. Biggest risk for Apple is the health of its CEO.

  5. Subhi on July 22, 2011 at 7:55 AM said:

    Rajesh, nnYour point about media company u00a0is a good one. I thought about Apple as a potential buyer for a company like Hulu. But I don’t think that is the kind of media company that Apple would be interested in. Apple already sells multimedia over iTunes. I am not sure how interested they will be in a low fixed monthly payment model approach taken by the likes of Hulu & Netflix.

  6. Rajesh R Shenoy on July 28, 2011 at 11:52 AM said:

    Twapple :)u00a0nnhttp://scoopertino.com/twitter-swallowed-by-apple-relaunched-as-twapple/

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