Yesterday, Apple sold $17 billion in debt offering to investors, the largest corporate-bond deal in history. Apple’s first debt-offering in over 20 years is part of its plan to return $100 billion to shareholders by the end of 2015. This plan is a response to pressure put on Apple to use their excess cash hoard of $145 billion, much of which is tied up overseas.
Earlier this year, David Einhorn’s firm, Greenlight Capital, sued Apple in order to tap into this cash reserve. Einhorn proposed Apple issue “iPrefs,” preferred shares with a guaranteed lifetime dividend of 4%. Einhorn later withdrew this proposal.
Apple is not the only company to horde cash. In 2012, U.S. companies had $1.45 trillion in cash, up 10% from $1.32 trillion in 2011. Companies that continue hording excess cash are likely to face shareholder pressure. Typically a company has three options:
1) Give out Dividends: Return the excess cash to its shareholders in the form of dividends.
2) Buy Back Shares: This strategy effectively returns the cash to its shareholders.
3) Acquisition: Invest the excess cash in strategic growth through acquisition. Having plenty of cash makes purchasing another company easier. Acquisition is one of the fastest ways for a company grow, especially as it faces challenges from competitors.
In the case of Apple, the company has plans to repay shareholders by increasing dividends and buying back stock by raising $17 billion in debt-financing.
Last quarter, Apple’s profit declined for the first time in ten years. Only time will tell how Apple will perform in the future, but according to the record amount of debt raised, investors are optimistic about its performance.
