Timeline Strategy Consulting

Companies' Cash Holdings: The Winners and Losers

Apple did not always have this cash 'problem'. If one looks back at their 2005 cash position, it's interesting to note that they had only a little more cash then than they have managed to generate in FY 2008 alone.

What's the difference? iPhone! Not only is it a magnificent way to generate annual sales of 10+ million units at a revenue per unit level equal to the Mac Mini (iPhone subsidized price that carriers pay is $600+), but the subscription revenue model also means that the cash is recognized immediately while the revenue comes in slower.

In short, this line extension will so much increase Apple's cash position that it funds anything that they choose to do. Thus far, that has not been something as dramatic as a big acquisition or a share buyback. However, I would argue that using cash to make supply agreements such as what they entered into with LG, is a very good use for their cash. At a time when global demand is soft, their money can buy a preferential supply position that should theoretically ensure a years-long lead with new technology like OLED.

Furthermore, Apple wanted to play it somewhat safe with this cash position should there be a year-long and deep recession. Layoffs crush the culture at innovative companies, and should be avoided like the plague. The cash guarantees that layoffs don't need to happen. Leave those for Microsoft.

Finally, people seem to itch for Apple to spend its cash, but who shouldn't underestimate how difficult it is to pull off a successful acquisition. Even the best acquisitions are a years-long diversion for big portions of a business. The business world is littered with unsuccessful acquisitions, or acquisitions that could be considered modestly successful, but that had an opportunity cost that was too high. Apple has been wildly successful without big acquisitions. It's just not their style.