//Slowly, over time? It's not as though $600B cash is exactly out of reach for Apple
You do know that the cash Apple has in its balance sheet belongs to its shareholders and that Apple can't use that to buy itself and go private?
You do know that the cash Apple has in its balance sheet belongs to its shareholders and that Apple can't use that to buy itself and go private?
Ok, so you mean Apple (the public company) borrows money, and then goes private. Now who would that private entity be? And which entity would be repaying that loan now since Apple (the public company) that borrowed money would no longer be an entity as it went private.. care to clarify?
And regardless this has nothing to do with Apple running a stock buyback.
Right now insiders hold maybe 1% of Apple stock. So there's a 99% transfer of ownership happening when the company "buys itself". Does the company lose 99% of its value in this or is there somehow a transfer of about 500 billion dollars into the hands of these insiders? How are either of these situations not entirely terrible?
It will never happen and is logistically impossible: you are absolutely correct.
Imagine the final two shareholders, each holding one share with 250 billion. For the company to buy one of these shares, it will require 250 billion in cash. The value of the company will drop by 250 billion after this transaction (because it just spent all that money) and therefore half the value has been destroyed. Now do the math upward and you'll see that to buy the 3rd share, the company lost 1/3 of its value. And for the 4th it lost 1/4 and so on.
Putting the entire company into the hands of a few insiders would require destroying virtually all the value in the company, including liquidating its assets because the market cap is far higher than the cash on hand is or could be (because market cap will always reflect cash on hand). In fact, if Apple tried to "go private" this way, it would fail to do so because much of its value is in intangible assets like tribal knowledge that cannot be sold. It does not have tangible, fungible assets that total to its market cap.
In the case of Dell, Michael Dell was the largest independent shareholder, he partnered with a private equity firm to buy outstanding shares back, and then the Dell, inc. entity has to pay back the private equity firm with revenues from sales and sales of assets.
http://www.dell.com/learn/us/en/vn/secure/2013-02-04-michael...
Not really true - what exactly do you think the current stock buyback program consists of? Apple is using it's cash to buy it's own stock from the market.
By this logic you could just hold one share of Apple stock forever and end up the sole shareholder if they just keep doing their buyback. Except of course there are many other people who would refuse to sell. And when no one wants to sell, the buyback either fails or becomes a terrible investment.
If the market cap of Apple is currently $500 billion and they have $200 billion of cash on hand it means the market thinks the company is worth $300 billion. While spending $200 billion on the buyback will put upward pressure on the price of the stock, offloading that cash will put a downward pressure on the stock. Since the ratio of cash to market cap is so high for Apple, the stock really wouldn't see a huge rise in a buyback. The end result would be anyone who didn't participate in the buyback would now owns a larger piece of a smaller pie. The assumption is that the "internal" stockholders would be in that group. The reason it would never happen is because those investors would have to buyout enough people to amass 51% ownership in the company. That means they would need over $150 billion of the $300 billion post buyout value in cash and stock.
The problem with this scenario is not that Tim Cook and a small circle of insiders can't get 300 billion in loans (though they can't). The problem is that this scenario has nothing to do with the stock buyback. If Tim Cook can get a loan for 300 billion to buy Apple stripped of its cash, he can certainly get a 500 billion loan to buy Apple before the cash is gone. The 200 billion loan will be paid with the 200 billion cash, so that's the easiest part to finance.
Even the need to pay a premium over the current price isn't gone in the 51% scenario. If Took Cook holds 51%, he can vote to sell. But if he votes to sell to himself at a price less than the other 49% would agree to, he will absolutely be facing a 100+ billion class action lawsuit. You cannot use majority ownership in a company to take further ownership from others at a price less than they would otherwise accept. To do otherwise is to steal from the other stockholders and no different functionally than voting for a sale to yourself at a discount. If this strategy were legal, you could indeed buy 51% and then force a sale for pennies per share.
Besides all this, the 150 billion to hypothetically buy 51% of Apple stripped of its cash is not meaningfully different than 250 billion to buy 51% of Apple with 200 billion in cash intact. The additional loan amount for the cash seems like the easiest part to finance. If "buy 51% and force the rest to sell" were a legal strategy, you could pursue this strategy as easily before the cash is gone as afterward.
So again, the viability of Apple going private has nothing to do with the stock buyback.
It would be easy to get financing to purchase 49% of the company if you had 51% of the company to put up for colleteral. You could even theoretically do a leveraged buyout with a much smaller percentage of ownership. Michael Dell did it with something like 20% of the value of Dell. The reason you might need 51% here is to force it through. The actual price paid on that 49% percent is almost irrelevant to this discussion because of this easy financing. The problem is acquiring the first 51%. That is why I said the following in my last post
>The reason it would never happen is because those investors would have to buyout enough people to amass 51% ownership in the company. That means they would need over $150 billion of the $300 billion post buyout value in cash and stock.
The stock buyback is an important part because it increases the insiders' percentage ownership of the company while not raising the value of the company. If Apple were to purchase a 100 million shares of the company, they would also be spending Apple's money. That transaction is completely balanced, company value doesn't change. If Tim Cook purchased 100 million public shares of the company, the stock would go up because it is injecting new money into the equation.
> The stock buyback is an important part because it increases the insiders' percentage ownership of the company while not raising the value of the company. If Apple were to purchase a 100 million shares of the company, they would also be spending Apple's money. That transaction is completely balanced, company value doesn't change. If Tim Cook purchased 100 million public shares of the company, the stock would go up because it is injecting new money into the equation.
Tim Cook buying 100 million on the stock market doesn't meaningfully change Apple's price. If he buys 100MM in stick, it just means that he takes ownership of the stock from someone else who walks away with 100MM. There's no new money "injected". If he wants to buy a significant amount of stock, there will be some upward pressure on the price, because you have to find someone willing to sell, but that same condition applies to Apple. They have to buy on the open market just like Tim Cook. If a 100MM purchase is going to push up the market cap by 0.1%, it'll do the same for both.
As for the buyback being important because it increases insider's ownership, no, it doesn't. At least not in any meaningful sense. There's maybe 1% held by "insiders". If Apple buys back 175 billion in stock at their current price/value (a terrible assumption, but whatever), they'll take 33% of the stock back. So the insiders will hold 1.5% instead if none of them sell.
It's not possible for even an extended buyback to drive up the insiders' shares to a significant amount. And I don't mean "not plausible". It mathematically doesn't work. Apple has far more in real estate alone than the insiders' shares are worth. To hand them significant ownership of the company would mean to destroy the company by liquidating everything and leaving them a husk (even the name is worth more than the insiders' shares).
And yes, they could theoretically get loans to buy most of the company, but again, that's no different before or after the buyback. As you noted, the stock buyback is (theoretically) balanced.
The injected money (or I will admit more accurately injected value) comes from increased demand. The only effect of Tim Cook buying shares in increased demand for Apple stock. Meanwhile Apple buying shares will be coupled with a decrease in value of the company's assets. Tim Cook's purchase only provides upward pressure on the market cap. The buyback provides downward pressure as well.
>As for the buyback being important because it increases insider's ownership, no, it doesn't. At least not in any meaningful sense. There's maybe 1% held by "insiders". If Apple buys back 175 billion in stock at their current price/value (a terrible assumption, but whatever), they'll take 33% of the stock back. So the insiders will hold 2% instead if none of them sell.
Personally I would say doubling your ownership percentage is meaningful. But like I said earlier the whole thing relies on the insiders having $150 billion in stock + cash which they almost assuredly don't and likely can't raise. You keep on ignoring that condition. I am arguing a hypothetical situation in which they do have that money. You seem to be arguing that even the hypothetical is impossible because they don't have that money.
Sure, the buyback applies some downward pressure on market cap in addition to the upward pressure. In theory it all evens out anyway. If cash is valued correctly by the market, then a buyback has no effect on price at all.
> Personally I would say doubling your ownership percentage is meaningful.
That was a mistake on my part. It's only a 50% increase, not a 100% increase.
> But like I said earlier the whole thing relies on the insiders having $150 billion in stock + cash which they almost assuredly don't and likely can't raise. You keep on ignoring that condition.
What you're ignoring is that the buyback is irrelevant if you assume Tim Cook has access to absurd amounts of loan money. If he can get hundreds of billions of dollars to buy Apple after a buyback he can certainly accomplish it before the buyback.
Frankly the initial "insider" status is also irrelevant. Tim Cook can spend 150 billion before the buyback for 33% of the stock or 150 billion after the buyback for 50% of the stock and the result is the same assuming the market values cash on hand correctly. He spends 150 billion and ends up with 50% of the smaller company.
You also keep saying 150 billion as if it's somehow sufficient to buy the company. It isn't. It isn't even close. If you assume the market cap will drop to 300 billion after the buyback, 150 billion gets you majority control. But to buy you need 300 billion plus a premium over the trade price so you don't get sued to death. So call it 360 billion total (20% premium). This is not much lower than simply buying Apple outright before the buyback for 600 billion (20% premium). Cancel out the cash and you're at 400 billion. So all you've done is erase the 20% premium from the cash on hand (which the market would presumably do for you anyway).
Or to put it another way, the buyback is irrelevant.
So, look, the value of Apple is A + C, where A is the present value of Apple's business per se (that is, how much you value owning the thing that makes iPhones and sells them), and C is Apple's more-or-less cash stockpile.
Unless you think that A is 0 or negative (which is obviously absurd), Apple can not buy itself. Any money it has just raises the total value of the company. Any money that it returns to investors lowers the value of C, but not A. If 51% of Apple investors want their shares of C, they can literally just choose one of themselves, fire Tim Cook, put that person in charge, and order C returned to investors through dividends -- and they'd still have A.
Given that, why would they accept C money for an asset definitionally worth A + C?
A company cannot own itself.