There are many companies over the years which have been phenomenally successful and accumulated masses of net cash. We only need to look towards Apple which has a war chest well in excess of $200 billion available to spend. When the company was growing this was a great comfort blanket for investors but now growth may be about to start slowing, how will Apple grow the business and how will it spend the massive war chest?
Excessive cash can be a curse
Even if interest rates were anywhere near traditional levels the idea of having so much cash uninvested does not reflect well in the longer term. The directors of a company are there to look after the interests of shareholders and ultimately if they are not able to spend this money in a sensible manner then eventually they will be replaced. The Apple warchest continues to grow and grow and despite rumours and counter rumours regarding potential takeovers nothing of any significance has happened.
Returning cash to shareholders
While nobody would turn down a special dividend or cash return this would not show directors in a good light. Shareholders must wonder why a company like Apple, which has shown significant growth over the years, is unable to invest for the future. It may be time to broaden the operations of the group, although there are added risks, because ultimately the main Apple business is throwing net cash out each year. This would suggest that the main business as it stands today does not require further investment.
In the longer term it would be a disaster for shareholders if these funds were not reinvested for future growth and were simply paid out with all of the relative tax disadvantages.
To build or buy
With over $200 billion in its war chest Apple could very easily set up a new business from scratch to take on companies in any area. Then again, why go through the rigmarole of setting up a new business and waiting for it to grow and turn profitable when you can literally snap up almost any business you want?
This in itself poses yet another problem for Apple because potential takeover targets and their shareholders are well aware the company has billions of dollars to spend. If Apple was to make an approach for a company why would they give themselves up cheaply? A company such as Apple would only make an approach if it was certain about a deal and having to walk away without an agreement would be a disaster.
Investors becoming concerned
Over the last couple of years investors have become more concerned about a lack of movement on the multibillion dollar war chest. As we touched on above, while Apple has not yet gone ex-growth it is proving more difficult, expensive and more risky to introduce new products to the market. The larger the company becomes the more investment required to make even the smallest dent in long-term profitability. There has been talk of a takeover of Netflix as well as Tesla Motors amongst others. As you would expect the company has been tightlipped about its detailed long-term plans but surely the group must have takeover targets in mind as an additional future leg of the group?