Tim Cook, Dr. Dre And The Battle For Apple's Cash

May 12 2014, 8:34am CDT | by

The news that Apple is nearing a $3.2 billion acquisition to buy Beats Electronics is one of the biggest business stories in the nation. The potential deal has received so much attention because it would be Apple’s biggest acquisition ever. It would push rapper and music producer Dr. Dre’s net worth to an estimated $800 million or so. It has already sparked a vigorous debate about Apple’s strategy in the music business and the future of streaming music.

But there is something else going on here. There is a hugely consequential battle underway for Apple’s cash that will produce some massive winners. Apple has an absolutely enormous amount of cash. Its cash horde now stands at some $150 billion. As Apple started to accumulate this unprecedented treasure chest last decade, CEO Steve Jobs stubbornly refused to spend any of it. A unique and extraordinary man, Jobs built what at one point was the world’s biggest company by market value by urging people to “think different.” He consistently baffled observers by resisting calls to spend his company’s money, saying on a conference call in 2010 that “we’d like to continue to keep our powder dry.”

Since Jobs passed away in 2011, the calls for Apple to do something with its cash have grown stronger. As the company’s cash on hand kept growing, it became inevitable that Apple CEO Tim Cook would need to put the money to work one way or another.  The loudest call for Apple’s cash has come from some of the company’s shareholders. They want it. Billionaire hedge fund manager David Einhorn, whose Greenlight Capital hedge fund owns Apple shares, last year publicly lobbied for Apple to return some of its cash to shareholders, saying Apple was behaving like his grandmother and had adopted a “depression-era mentality.” Einhorn put forward a proposal that Apple should issue perpetual preferred shares that he called iPrefs, which would pay dividends to its owners. Einhorn even sued Apple at one point, but eventually dropped the lawsuit after winning a favorable ruling.

Next up, billionaire activist investor Carl Icahn made Apple his biggest single stock holding and started agitating for the company to repurchase a large number of its shares. At one point, Icahn had a dinner with Cook and said he wanted a $150 billion stock buyback. “It’ a no brainer and it makes no sense for this company with their multiple being so low not to do a major buyback,” Icahn said in October. He submitted a non-binding shareholder resolution to push for a $50 billion buyback, but by February 2014 he abandoned his effort. But Icahn, Einhorn and the other investors clamoring for Apple’s cash helped push the company to return capital to shareholders in a serious way. Apple is now in the process of returning $130 billion to shareholders via dividends and buybacks by the end of 2015.

But Apple’s potential deal for Beats has now made it seem possible that people who are not Apple shareholders could be the biggest winners of a Cook spending spree. As Peter Kafka of Re/code noted after the Financial Times first broke the news of the deal talks between Apple and Beats, “if the Beats deal means Apple has changed its perspective, Silicon Valley deal-making may get much more interesting.”

Apple has consistently avoided making big deals in the past, but if the Beats transaction means Cook is ready to go into deal-making mode, the trickle down effect in the tech world could turn into a flood. Facebook recently turned Jan Koum and Brian Acton into billionaires by buying the messaging service they founded, WhatsApp, for $19 billion.  Jim Goetz and his venture capital firm Sequoia were the big financial backers of WhatsApp and their funds will get some $3 billion from the deal, the largest venture capital exit of all time.

It makes sense that Silicon Valley would get excited about Apple and its mountains of cash joining the deal-making fray. Marc Andreessen, co-founder of one of the most powerful venture capital firms in Silicon Valley and a prolific tweeter, took to Twitter after news of the Beats talks broke to point out that Apple produces about $1 billion of cash a week and could generate the cash to pay for the Beats acquisition in three weeks. “Question is not why are they being aggressive in buying Beats; question is why are they so conservative on not buying everything else?” Andreessen tweeted. When I replied to Andreessen that, as a Silicon Valley venture capitalist, he “would not mind if Apple started buying up everything in sight,” Andreessen scolded me to try “engaging on logic instead of ad hominem.” When hedge fund manager John Hempton tweeted that Andreessen’s comments were “said by someone with plenty to sell them,” Andreessen took a friendlier tact. “Sorry, I can’t quite make out what you’re saying, I’m heading into a parking garage,” he replied.

For now, the biggest early winners of the battle for Apple’s cash could very well be Beats co-founders Dr. Dre and Jimmy Iovine, and Bill Conway and David Rubenstein, the billionaire private equity co-founders of the Carlyle Group, the private equity firm known for doing leveraged buyouts of government contractors and industrial companies that uncharacteristically invested $500 million in Beats last year.

In some ways, the man who has the most at stake is Tim Cook. For Cook, the direction where Apple’s cash flows will certainly help define him. One of the most important jobs of most CEOs—perhaps even the most important—is determining how the excess cash that is generated by their companies is spent and allocated. Maybe Apple will invent a killer television set. But just as likely, Cook’s cash decisions will determine his legacy and shape the future of Silicon Valley and the technology sector for a long time to come.

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Cannabis could be as addictive as drugs
New York, Sep 2 (IANS) As more people are able to obtain and consume cannabis legally for medical and, in some states in the US, recreational use, people are less likely to perceive it as addictive or harmful. But a research study proves otherwise.
 
 
New sensor to detect tiny, individual nano-particles
Washington, Sep 2 (IANS) In a major breakthrough, a team of researchers has developed a new sensor that can detect and count nano-particles, at sizes as small as ten nano-metres, one at a time.
 
 
Experiential purchases more satisfying than material ones
New York, Sep 2 (IANS) Spending money doing things or buying experiences makes people feel a lot more happier than spending money on material things, a study says.
 
 
Eat fruits daily for healthy heart
London, Sep 2 (IANS) Daily fruit consumption cuts the overall risk of death by 32 percent and cardio-vascular diseases (CVDs) by up to 40 percent, a study shows.
 
 
 

Latest from the Network

US warplanes drop leaflets on Iraqi city
Baghdad, Sep 3 (IANS/EFE) US warplanes Tuesday dropped thousands of leaflets on the northern Iraqi city of Mosul, urging residents to keep clear of places occupied by the Islamic State (IS) extremist group that overran...
Read more on Politics Balla
 
US CDC calls for global response against Ebola
Washington, Sep 3 (IANS/EFE) The head of US Centers for Disease Control and Prevention (CDC) Tuesday warned of the risk that the Ebola outbreak could get out of control without a greater worldwide response. "This is...
Read more on Business Balla
 
Don't have a perfect body: Charlize Theron
Los Angeles, Sep 3 (IANS) Actress Charlize Theron says she doesn't have an ideal figure, but is happy with the way her body looks. The actress features on the cover of Modern Luxury's September 2014 issue and looks...
Read more on Celebrity Balla
 
Kate Hudson is 'basically married'
Kate Hudson says she and Matthew Bellamy are ''basically married.'' The 35-year-old actress, who has son Bingham, three, with the Muse frontman, 36, admits they're in no rush to plan to a wedding and she rarely wears...
Read more on Celebrity Balla
 
Cee Lo Green's reality show is axed
Cee Lo Green's reality TV series has been axed. TBS announced on Tuesday (09.02.14) that the 'Forget You' hitmaker's show, 'The Good Life,' which focused on his attempts to juggle his careers as a producer, recording...
Read more on Celebrity Balla
 
Chris Martin spends weekend with Gwyneth Paltrow
Chris Martin and Gwyneth Paltrow spent the weekend together in the Hamptons. The former couple, who announced they were ''consciously uncoupling'' in late March after 10 years of marriage, reunited at their home in the...
Read more on Celebrity Balla
 
Mali mine blast kills four UN peacekeepers
Bamako, Sep 3 (IANS) Four United Nations peacekeepers were killed and 15 others injured after their vehicle hit a landmine in Mali Tuesday, security sources said. The UN vehicle was hit by a landmine when the...
Read more on Politics Balla
 
Kate, Cara new faces of Burberry's latest fragrance
London, Sep 3 (IANS) Supermodels Kate Moss and Cara Delevingne have been roped in as the new faces of Burberry's latest fragrance. The models are pictured in the campaign for the label's latest scent My Burberry, shot...
Read more on Celebrity Balla
 
Former Israeli PM on trial again for corruption
Jerusalem, Sep 3 (IANS) Israel's former Prime Minister Ehud Olmert appeared before a Jerusalem court Tuesday after the state prosecution reopened a corruption case against him. Olmert was acquitted in what came to be...
Read more on Politics Balla
 
11 killed in Argentina van accident
Buenos Aires, Sep 3 (IANS/EFE) At least 11 people were killed Tuesday when a van carrying teachers collided with a truck in Argentina, police said. The accident occurred about 7.45 a.m. near El Simbol, 1,000 km north...
Read more on Politics Balla