My colleague Farhad Manjoo asked on Twitter if Apple could use its cash stockpile to take itself private. A bunch of smart tech bloggers are also talking about this on Branch. It’s an interesting issue. The answer is almost certainly that it wouldn’t work, not because the math doesn’t work out but because no bank is big enough to underwrite an operation of that scale.
After today’s share price decline Apple’s market capitalization is $378.25 billion. Figure a very large aquisition premium of 50% and say you’d need a $567.38 billion loan to take the company private. Junk bond yields hit 5.5 percent this wake, meaning the company would need to generate $31 billion a year in nominal earnings to make the interest payments on the loan. Apple’s Earnings Before Interest Taxes Depreciation and Amortization was $59 billion last year—more than enough to make the payments. So if Apple’s managers are confident in the company’s ability to maintain its 2012 level of earnings into the future they’d be way better off under a management buyout that took the company private than they are as employees of disgruntled shareholders.
The problem here is that in inflation-adjusted terms the largest leveraged buyout in history was KKR’s $55.38 billion aquisition of RJR Nabisco back in 1989 (that was $31.1 billion 1989 dollars). Could Apple tap its ~$140 billion in cash reserves to cut down on its borrowing needs and make the scenario more realistic? It sure could. But the problem is that a $512 billion loan isn’t really any more realistic than a $567.38 billion loan. It’s just way too much money. They say some banks are too big to fail, but Apple is too big to buy.
Now that said, if Apple keeps earning profits and stacking up cash while investors keep getting pessimistic about the company’s future outlook the gap does narrow. I’m told that in Japan, it’s not uncommon for firms to have cash balance sheets that exceed their total market cap. But Japan has almost no leveraged buyout industry and Japanese law makes takeovers very difficult. This is America. The current trajectory Apple is on, in terms of both share price and management strategy, is toward some kind of eventual management buyout scenario. But we’d need to walk another several hundred billion dollars down this road before that became feasible.