When Apple Inc. CEO and co-founder Steve Jobs died in 2011, every Apple investor, supplier and customer had the same question: Would the creative energy that turned Apple into the most successful technology company die with him?
Two years later, the question remains open but the omens are worrisome. There is ample evidence that Apple is becoming a “financialized” company, that is, one that will make shareholder value the primary goal even if it espouses its passion for continuous innovation. Four months ago, CEO Tim Cook committed to hosing out as much as $100-billion (U.S.) to shareholders by way of stock buybacks and cash dividends by the end of 2015.
The extraordinary move – Apple had never indulged investors with buybacks so lavish – came shortly after one of the planet’s most powerful hedge fund managers, David Einhorn of Greenlight Capital, pushed Apple to “unlock” shareholder value worth potentially hundreds of billions of dollars. It appears Mr. Einhorn is getting his way, and there may be more shareholder goodies to come as the company pumps out profits the size of some developing countries’ GDP.
Apple under Mr. Cook has hardly been a razzle-dazzle machine. Since he took over, there has been no product launch to equal the iPod (2001), the iPhone (2007) and the iPad (2010), though judging him after a mere two years in the saddle seems churlish – breakthrough products don’t come at regular intervals. Early next month, Apple is expected to unveil a sexed-up version of the iPhone 5 and a low-price knock-off of the same gadget, which may be called the 5C, designed to compete with Samsung and other Android models in non-wealthy parts of the planet. Ho-hum.
The share price has also been ho-hum. A year ago, the shares hit $705, making Apple the most valuable publicly traded company. They now trade at about $500, though they had sunk to $385 in April. Whether the recent climb has to do with shareholders charging after the handouts demanded by Mr. Einhorn or optimism that Apple, having seen off BlackBerry and Nokia, can do the same with a surging Samsung, is open to debate. My guess is that it is the former.
At the end of the last fiscal year, Apple was sitting on $121-billion in liquid assets (cash, cash equivalents, short- and long-term marketable securities). That’s a fortune and “investors” who had nothing to do with Apple’s phenomenal ability to create must-have consumer items are yearning for a plump slice of the retained and future earnings pie.
In a paper called “Apple’s Changing Business Model,” to be published in the December edition of Accounting Forum, the academic team led by William Lazonick, director of the Center for Industrial Competitiveness at the University of Massachusetts Lowell, concludes that Apple is already undergoing a personality downgrade. “Captured by shareholder value ideology, Cook and his top executive team have opted to support value extraction rather than value creation … In other words, Apple is becoming a typical American corporation,” they write.
That’s a provocative statement, and one that could prove wrong if Mr. Cook sends the bloodsuckers packing and rolls out a killer product. But, sadly, Mr. Lazonick and his colleagues have a point.
What is a “financialized” company? It is one whose management buys into the cult of shareholder value and devotes an inordinate amount of resources to share buybacks and dividend payments, all the better to reward hit-and-run shareholders and executives stuffed to their cufflinks with options. Buybacks have always occupied the dark side of capitalism. They signal that management lacks the incentive, or imagination, to put the loot to better use, such as R&D or employee development. Buybacks also reward those who sell their shares, not those who hang on to them, as dividends do.
When Mr. Jobs was running the show, Apple could hardly be accused of existing to “maximize shareholder value,” a term that came into vogue in the 1980s and has become even more popular today. He did want profits, and excelled at making them, but mostly to muster the resources to develop more game-changing products. In a 2009 TV interview, he said, “Someone long ago told me, ‘Manage the top line, which is your strategy, your people and your products, and the bottom line will follow.’”
There were times when coddling investors was paramount at Apple, but it wasn’t during the era of Mr. Jobs. In 1993, when John Sculley was CEO, the phrase “maximizing shareholder value” first emerged as a key management goal, according to Mr. Lazonick, with bonuses and options tied to it. Not surprisingly, dividend payments and share buybacks soared during the Sculley era, from 1983 to 1993, and Mr. Sculley became America’s top-paid tech executive. His reign did not end well. Profits declined sharply in his final year and, not long later, losses piled up. The shares hit $4 in 1997 and the company’s survival did not seem assured. Mr. Jobs returned from exile that year and used a series of exquisite new products to turn the company into a profits juggernaut.
In March, Warren Buffett, one of the greatest value creators of all time, used a CNBC interview to give some unsolicited advice to Mr. Cook, who was then being hounded by Mr. Einhorn. “I would ignore [Einhorn],” he said. “I would run the business in such a manner as to create the most value over the next five or 10 years. You can’t run a business to try and run the stock up every day.”
A month later, Mr. Cook made his $100-billion distribution commitment. With Samsung and a few other rivals coming on strong, and Apple fiddling with updates of existing products, could this money not be put to better use?