Apple's biggest acquisition

At the end of the first quarter 2013 there were 946,035,000 fully diluted shares of Apple stock outstanding. At the end of the second quarter there were 924,265,000. The 21,770,000 shares that disappeared were purchased by Apple and retired. Apple shares traded between $390 and $463 during the quarter so it’s hard to know exactly how much Apple paid for them, but at an average of $426.5 per share Apple would have spent $9.3 billion

Management explains:

In late April we executed a very successful debt offering issuing 17 billion of debt across 3, 5, 10 and 30 year maturities. We paid $2.8 billion in dividends in the quarter and we also utilized a total of $16 billion in cash on share repurchase activity through a combination of a new accelerated share repurchase program and open market purchases. $12 billion of the $16 billion was utilized under a new ASR program initiated with two financial institutions in April.

An initial delivery of 23.5 million shares was made under this program with the final number of shares delivered in average price per share to be determined at the conclusion of the program, based on the volume weighted average purchase price of Apple’s stock over the program period, which will conclude in fiscal ‘14. In addition to the new ASR, we executed $4 billion of open market share repurchases, resulting in the retirement of 9 million additional shares.

Later, during Q&A:

Tavis McCourt – Raymond James: Thanks for taking my question. Peter, first a clarification on the share buyback and can you tell us what the ending basic share count was in the third quarter?

Peter Oppenheimer: All of that is on the income statement, so you got the ending basic and diluted, but let me give you a couple of points that I think could be helpful for you. During the June quarter, we concluded the first $2 billion ASR program that we started in December and then so we got the final shares in on those, and we did our second ASR program of $12 billion, that started at the end of April and we received 23.5 million shares initially on that. And I went through in my prepared remarks, at some point during fiscal ‘14 that program will close and we will get the final number of shares. We also bought back $4 billion of stock in the open market during the June quarter and received about 9 million shares. So, the impact of those in the June quarter lowered our diluted share count in the quarter by about 22.9 million shares. And as you look forward into the September quarter before any further buybacks or any issuance to employees we would expect to see an additional approximate 11 million share benefit from the things that occurred during the June quarter.

This is a bit convoluted, but it seems that Apple has committed to buy $16 billion worth of its shares but has not completed the retirements. They see an additional 11 million shares being retired from activities conducted in the June quarter. (Nota bene: when calculating future EPS, take these shares out of consideration.)

If we add the 11 million yet-to-be-retired to the 21.7 million already retired and assume $16 billion was paid for them then the average price paid was $488.25.

Not a bad price. Share re-purchases are valuable only if the price paid is low (a determination that is usually beyond the scope of management to make.)

But what is even more interesting is that if we consider the $16 billion expenditure as an acquisition, then Apple has made what amounts to its biggest. It’s more than some familiar companies are worth:

Screen Shot 2013-07-25 at 7-25-11.38.09 AM

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  • graphex

    Horace, is this right…?

    $12.20 dividends saved on 32,700,000 shares is $398,940,000/year and cost of borrowing is $300,000,000/year. But as cost is pre tax and dividends are post tax, is savings or improvement to the company balance sheet actually: $203,000,000/year (398,940,000 – 195,000,000)?


    interest costs from here:

    • DarwinPhish

      Those numbers look about right. The dividend and share re-purchase are as much about tax planning as anything else. This is what happens when interest rates are at historical lows and you have a lot of income that could be taxed at relatively high marginal rate. Once the dividend yield got high enough, this move was a no-brainer.

      The only impact on EPS, as Horace noted, is that the number of shares goes down. There is also a positive impact on retained earnings.

    • ChristopherDungeonDotCom

      EPS goes up inverse to the same percentage that total share count is reduced.

      For example, if the total share count goes down 3%, you can expect EPS to go up 3%.

      Hope that helps!

  • Scottm

    Doesn’t $488.25 seem quite a high price to pay with the shares trading in the lower 400s most of the quarter?

    • tfd2

      yes, i’m curious about this. how is the purchase price higher than the market price? i wish the marker price was $488!

  • Walt French

    Alas, no new talent, IP or other resources in that acquisition.

    • acquisitions

      Perhaps they should buy aQuantive.

    • DarwinPhish

      The price of the stock went up because demand went up. That is the way the markets work. Also, many in the market realized that because of low interest rates, a high dividend yield and no changes in US tax law, the effective cost of the repurchase would be less than 0.

      • ChristopherDungeonDotCom

        A stock’s price can also go up with a fixed demand and a reduced supply, which is what happens when you buy back shares on the open market.

    • Tatil_S

      I think the penny pinching has been a bit too much. Considering the flak Apple is taking due to Maps, it could have used a million per month to hire a hundred people (more than $50 per hour including benefits) to fix the location data or update mistakes in road maps that are reported by users. Many of those can be checked against other electronic sources without any boots on the ground. Checking roads against satellite pictures, browsing the websites of libraries, restaurants or public transit systems to find out whether the addresses in Apple’s database are really incorrect or calling the businesses directly to get confirmation is relatively easy.

      I think an employee can fix 5 mistakes an hour on average, making the cost of each one of the 80,000 monthly corrections about $10. The price is certainly high, but the idea would not be fixing every one of the countless errors, but fixing those that are noticed by those users who either care so much about maps in general or who feel enough affinity for Apple to bother submitting corrections. If Apple made them feel like it cares about them, it would go a long way in keeping them loyal customers and obtaining positive word of mouth PR. Instead the error reports goes into a black hole, leaving the users simmering and with the impression that Apple does not care or it is too cheap to fix any of the problems. It has been more than a year since the beta release and almost a year since the public release. Has there been any progress?

      • rationalchrist

        Hiring more people to fix errors is one part of the solution to map problem. Other problems are Apple Map lacking data which Google map has, eg. house and building outline. One of companies Apple just bought provides the tool for county and builder to upload platte map to Apple. Apple is trying to catch up Google here.

      • Tatil_S

        Building outline is a nice eye candy, but I’ve never seen anybody who is actually using it to fulfill a need. (I would trade all building outlines for accurate “outlines” of park and nature preserve boundaries.) When you drive somewhere only to find a restaurant or park or school 2 miles *that way*, now that is a real problem.

        Besides, adding features vs fixing errors are not mutually exclusive.

      • JohnDoey

        You can’t improve a giant product like Maps by throwing money at it. It has gotten better organically over the course of time and will continue to do so.

        I think iOS 7 is going to make people forget about the problems with Maps anyway. Six months from now, Maps will seem like a successful product launch.

      • Tatil_S

        Hiring a couple hundred people to fix mistakes in a database *is* organic improvement. Besides, some of it is about the perception of making improvements, just as it got more flak than it should because of the perception that it is worse that it actually is.

        It seems Apple is trying algorithms and its partners to solve the problem. “Software only” is not how Google got to where it is now, it will not let Apple get there, either. It has to hire actual people or maps will always be glaring deficiency in its ecosystem.

        By the way, I’d like to see some metric that shows that it actual has “gotten better organically over the course of time”. All the mistakes I saw in November has been there in July. All we’ve heard is two small acquisitions 10 months later. Meh…

      • jericl

        I think 7 will be great but you seem to think its a game changer. Can you expand a bit on why you feel this way?
        Eric in Austin

      • Walt French

        Microsoft famously dismissed Brooks’s The Mythical Man-Month on their way to their crash-and-burn of Kin.

        But everybody else knows that throwing bodies at a problem delays completion, rather than speeding it.Tatil_S has a good example where Apple under-staffed a project, and needed to right-size Maps by adding staff.

        A god organizational structure allows a company to both walk and chew gum at the same time. If Tim Cook, or some core group, is a bottleneck, Apple should address it.

      • kgelner

        I don’t think you understand the technical issues with mapping software in general. Fixing errors is more complex than you think, you can’t just use people off the street. People who are capable of doing that work are not common, it’s likely that Apple hired as many as they could, as fast as they could.

        Also the smart money is not taking the “infinite number of monkeys produce a good map” approach, it’s on figuring out how to integrate data sources with higher quality so you can improve the map for everyone all over the world quickly.

        At this point Apple has caught up in search quality, they still have some errors but so does Google and look how long they have been at it – a perfect map is just not quite possible.

      • Tatil_S

        > “At this point Apple has caught up in search quality…”
        What is your metric for this assessment?

      • Walt French

        For the life of me, I can’t think why you infer I don’t understand the scope of mapping. I referenced an earlier post by Horace where he noted Nokia’s $8 billion acquisition of a mapping company — that’s a lot of complicated — and I quoted how Apple had under-provisioned resources for mapping, leading to admission of an embarrassing failure and a body dumped by the roadside. If anybody didn’t understand how complicated mapping was, it was Apple.

        Anyway, it’s not the point. The question is, are Apple’s culture, talent, IP and resources enough to produce the product that Apple thought it was offering almost a year ago? If not — and it’s obviously not yet, because while they admitted the failure but haven’t declared the recovery — what has doing “everything we can” meant, and can they really do enough? Why isn’t it more than reasonable to ask whether they’ve put the resources to match the rhetoric?

        And of course, Maps are just one example where inadequacies remain unaddressed. The iOS6 cloud capability, for example, has been a thorn in developers’ sides, and iCloud’s bugginess caused them to seek third-party or proprietary solutions, denying Apple the superior apps and proprietary lock-in that the intended solution would have created. After festering for a year, it’s no longer the advantage it should have been, but rather a millstone.

        No organization can always be perfect, but the notion that Apple has financial resources that its culture has caused it to NOT deploy for badly-needed advances is troubling.

      • berult

        To be succinct, a worldwide mapping endeavor requires an objective framework. Today it does.  In years gone by,  it did not. Why?The highly competitive environment makes data gathering by human hands utterly unreliable, even counterproductive. Disinformation and hacking get in the way of a clean, upfront process.

        Google picked up data on the run with very little interference. That was then. They will make it impossible to replicate what came down to a simple, albeit massive, hunting/gathering process. Google has the means, and they have a stake in applying those means in subtle and stealthy ways.

        Apple has to gets its act together within an objective framework. Hence, iOS-in-the-Car.
        Embedding a combination of sensors, operating system, and real-time feedback loop. Some sort of intelligent bypass of any human willful intervention, other than the end user doing his or her thing of interest. Let the wheels, including the steering wheel, draw Apple Maps as they move along their axes of functionality.

        So, iOS in as many cars as possible, within the shortest timeframe as possible. Worldwide. And witness the metamorphosis of a stale mapping environment into a living, breathing, constantly moving human network. In action. In real time. Subconsciously mapping reality along the way, and getting to fully enjoy the network effect on future runs and odysseys.

        Extraordinarily powerful. And well worth the wait and the teeth grinding that will lead up to it. A mobile, and truly moving, talkative platform. And yes, I think it’s got an SJ aura to its grandiosity.

      • Walt French

        Nice way to connect the dots. But is there really any indication that Apple is preparing to tap into the monstrous volume of data that they ALREADY have from iPhones reporting their location every few seconds? If an iPhone is moving at 37 mph between points A and B, it’s pretty likely that a minor expert — the driver, who may or not be the iPhone owner — has decided that’s a good way to drive between A and B, and it produces, at that point in time, a 37 mph result, which might be good or bad depending on what other trips over the same segment accomplished.

        That’s a LOT of A.I., not just simple data mining. Likely, a many-hundred-million dollar effort. And one that’d make inclusion of all those specific autos’ data a modest upgrade, not a “Whoa! We never saw THAT coming!” moment, as earlier maps efforts seem to have been.

        Your suggestion is about as aggressive as anything I’ve seen in terms of how Apple could use free resources — a huge amount of location data that they’ve dealt with (all?) the privacy issues on — for a major service upgrade. It sounds terribly smart, better than the sketchy TV or watch ideas that are practically Googlesque in how half-baked the proposals have been. But danged if I can see any signs that it’s underway, which I’d like to, rather than the important, but extremely incremental scraps such as (finally) putting Maps on OSX.

      • iObserver

        Don’t forget Apple is a giant multinational company. They’d have to hire 100 people in every country in the world to fix them adequately, and that adds up to a whole lot for a product they give away as value-added. It needs to be a software and crowd-source fix. As a matter of fact, Apple just acquired a company that specializes in location data. So yes, they are acquiring and hiring and investing in improving maps.

      • Tatil_S

        The same English speaking lot of 100 people can make 80,000 corrections per month for all of the English speaking world. I don’t know if Apple is receiving that many corrections from users. In any case, Google is rumored to have a couple thousand people in India, some just to compare satellite pictures against road maps and walking paths. I guess this is the price to pay if you want to be a high end Maps provider.

      • David Stewart

        And yet Google maps are still riddled with errors. I’ve personally reported several only to be told I was wrong (even though I personal go to the locations regularly). Eventually one was fixed after a couple of years. I’ve run into entire towns missing from the maps around me. As has been said, the only way to really do this is have a streamlined crowdsource effort. Covering the entire world at a micro-detailed level is fantastically complex.

      • Tatil_S

        Google Maps is not perfect, for sure and in some instances I’ve seen Apple Maps offering better driving directions. Nevertheless, location errors or failures to find happen more often in Apple’s version. I agree with you on the need for a streamlined crowd sourcing effort. The app has an error reporting button, which did not exist when the data source was Google, so they are half way there. Unfortunately, Apple does not send an acknowledgement email to users, nor fix the errors. The error reporting mechanism feels like a black hole. Regardless of whether there is a backlog that Apple is working on, this is not how you keep your users loyal and happy. It is not just about doing something to fix mistakes, it is also about being seen to be doing something.

      • My town has 13 dog parks. Google Maps shows 9. Apple Maps shows 2.

        I reported this to them months ago. No change. A black hole indeed!

      • Tatil_S

        Does Yelp record them as dog parks?

      • PatrickCA

        Really? 100 people, 80,000 corrections? Probably not.

      • Tatil_S

        5 corrections per person per hour on average * 40 hours per week * 4 weeks * 100 people = 5*40*4*100 = 80,000. What is your guess?

      • Walt French

        It’s not as if Apple isn’t offering Maps as a part of a supposedly high-quality service offering.

        At Apple, we strive to make world-class products that deliver the best experience possible to our customers. With the launch of our new Maps last week, we fell short on this commitment. We are extremely sorry for the frustration this has caused our customers and we are doing everything we can to make Maps better.

        … The more our customers use our Maps the better it will get and we greatly appreciate all of the feedback we have received from you.

        (My emphasis)

        That was September, 2012; we’ve seen two acquihires in the last week to address some of the update/accuracy issues, but also that Apple passed on Waze, whose service heavily relies on crowdsourced data, Apple’s biggest potential advantage. (Given that Apple has hundreds of millions of devices logging their location all the time, it’s a bit surprising that none of their servers are noticing, “gee, none of the drivers are continuing past X on this arterial road and prefer the side streets.”)

        Non-insiders have no clue what organic hiring they’ve done, nor contracts with third parties. There might be a lot more. But the pace looks to be more consistent with their typically extremely deliberate behavior than it is with “we are doing everything we can.”


        Another way to look at Apple Maps is that it was excellent leverage to get Google Maps back on iOS without paying Google to do it. It’s been a pretty good investment from that angle.

    • stefnagel

      Growth or value stock? Apple will choose whatever position gives it more control over its decisions. Growth stocks look maniacal, cf. Amazon.

      • Walt French

        Growth stocks, especially tech stocks, always look maniacal, and Apple investors have had their share of wild swings that come from that. Not clear that Apple will have less control one way or the other; any change of control such as Jobs—>Cook naturally produces a lot of armchair quarterbacks.

        Apple’s business is to create crazy-great new products for consumers and businesses. I don’t think half the people working for Apple would stay if the company gave up on re-defining whole new ways people can interact with their environment, and a shift to a luxury goods company would cut off 3/4 of their customers as well.

    • Get real.

      The company has 143 ish billion. It’s silly that you think it is an either or.

      • Chaka10

        Agree. It feels like the company has essentially decided that $140 bb is enough for anything, literally, and is returning fairly close to 100% of additional cash generation. As it is, even with the share repurchase program running ahead of schedule, Apple still added $2 bb of cash.

      • Walt French

        “The problem was not the cash buyback per se, in my mind, but the fact that Apple could not find better use for the cash…”

        I don’t know how you can interpret this as a silly either-or complaint.

        Maybe I should’ve noted that they’ve been sitting on a mountain of cash for a couple of years, giving them the option of financing some big deal, or riding out a downturn, without Wall Street hassles, and over those years, nothing materialized. I believe in — maybe have posted about — the option value of cash that could’ve been exercised for a deal, but ex post, don’t see that the Apple process was actually very likely to have done a deal.

      • Chaka10

        “… the option value of cash that could’ve been exercised for a deal”. The option value of the $140+ bb is still there, can still be exercised, if the Apple capital return program can be funded out of future cashflows (or borrowing against future cashflows). I think that’s the intent.

    • Prof. Peabody

      I know you’re a big famous guy who posts here all the time and so forth and I’ve seen you cut people up who dare to disagree with you before but to me, a lot of what you say not only seems to make little sense, it’s wordy, rambling, and generally not worth the effort to read it. You also seem to internalise a lot of the biases of the financial industry and talk from a very specific point of view that never changes. I can see you are smart and knowledgeable so I always read your comments, but frankly, they are rather boring and not very informative.

      I don’t really have any comment other than that, I just thought you might benefit from seeing how others who are similarly smart like yourself, but not necessarily as involved in the financial world as you are, sometimes see you. The points you make seem very minor in proportion to the amount of ink you spend on them and your ebullient confidence in your ideas doesn’t seem justified by your actual output of ideas.

      Perhaps because Horace himself comes across as a genius, you come across as a sort of “hanger on” to genius? I’m not sure the comparison is doing you any favours.

      • Walt French

        I don’t see that Disqus provides a direct mail solution, and this really isn’t the place for such. But I WOULD appreciate an actual example of where I’ve “cut” somebody — I try to stick to the ideas and only call out somebody when I see a pattern of falsehood and/or trying to use emotional hooks to pull a discussion off-topic. I *DO* watch for down-votes and guess people use them to disagree or to signal that I’m being obtuse (which I think is the right reason for them). In that spirit, I’ll ask you to back up your complaint with evidence—off-thread.

        Perhaps Horace would forward any complaints — he has my email from some personal correspondence — in the interest of keeping his site useful to all.

    • Speaker to Wolves

      It’s absurd to presuppose that Apple’s dividend and stock buy back programs are evidence that it can’t find better use for the cash. Of course they can’t find better use for the cash, what do you want them to do? Launch a Mars mission? Buy Microsoft? Build a private army and invade Russia?

      The stock purchases aren’t evidence of anything except Apple’s tremendously embarrassing success in developing a business model most corporations today believe impossible. They (figuratively) build better mouse traps. That’s it. It’s not a business model that lends itself to being accelerated by huge cash infusions. It takes talent, not financial acumen.

      Apple’s cash pile is so huge that the biggest problem they face is how to invest in the company without said investment destroying them AS a company. Apple is well aware of the acquisition trap. Having a ton of cash makes it that much easier to tumble into the pitfalls of failing to do due diligence and expecting non-emergent “synergies.”

      Apple has had it’s share of bozo CEOs who didn’t understand the culture or how to organically grow a company without losing it to bean counters and soulless sales drones. Tim Cook has a much more reasonable idea than trying to plow hundreds of billions back into the company with no plan beyond appeasing analysts that keep trying to shoehorn Apple into business models they regard as canonical because they haven’t the insight God gave a flea.

      He buys companies for their technology, and he makes sure that the technology is actually something Apple needs before he buys it. When you do this, what you find is that there are damn few companies out there worth buying and most of them are terribly undervalued by Wall Street because many (if not most) analysts are confounded by anything more complex than a Starbucks coffee order.

      • Shameer Mulji

        “Buy Microsoft? ”

        There’s something that would keep Bill Gates up at night for many months lol.

    • Sacto_Joe

      I guess I’ll take a swing at this. (BTW, I think it’s ironic the Prof Peabody’s comment hit your comment as “rather boring and not very informative” when his was about the most boring and non-informative post I’ve seen in quite some time.)

      Consider an artist who suddenly becomes hugely successful, so much so that just managing his money makes practicing his art increasingly difficult. In a very real sense, I think that is Apple’s quandary. Now, speaking as a businessman (which I think you are, Walt, and which, btw, I have no problem with), it would be very easy to frown upon that artist if his approach involved, basically, buying back his own art! But from his point of view, it is an admirable solution. Not only does buying bits back make those bits remaining even rarer and thus increase their value, which keeps the present owners of his art off his back, but it’s actually a pretty decent “investment”, since all his new work will be sold at a better price. Also, should he some day run out of inspiration, he can always choose, in that case, to sell the works he’s bought back. Best of all, it’s a simple solution, which means he doesn’t have to be overly distracted from his true passion and talent, i.e., the creation of his art.

      Now, some investors are going to rail against this idea, for the simple reason that they are businessmen, and we’re talking “art”, for Pete’s sake! But isn’t that really the seminal problem with Apple’s stock price? Isn’t Apple’s m.o. at complete odds with a business approach? Doesn’t it make some people want to tear out their hair and yell, “Ye gods, that’s no way to run a business!”

      And yet.

      Is there really any arguing with the kind of gargantuan success Apple has achieved? And really, isn’t there the distinct possibility that, by doing things their way, Apple will continue to have other gargantuan successes, especially if they don’t need to get bogged down in the secondary issue of dealing with their windfall? And isn’t that chance what we, the long term holders of Apple stock, are really betting on?

      I know I’m betting on that. And for that reason, I have absolutely no problem with Apple’s solution.

      • Walt French

        Not a bad metaphor, your artist. Now suppose, the question is whether he buys back his works, or uses the money to hire an assistant. (John Logan’s play Red examines the hassles if Rothko had done just that.)

        The assistant, irksome as he sometimes may be, at least cleans the brushes, applies the gesso or background, gets sandwiches and otherwise lets the Great Artist focus on his art.

        Buying back the art may make be a savvy business move for the artist, but it won’t help him produce as much as hiring a good assistant.

        N.b.: Although I’m an investor by profession, my interest and comments here are about understanding how Apple makes the greatest impact on people’s lives via technology. I keep investment issues out of my posts, since neither my employer nor the SEC would be happy if I gave what appeared to be investment advice outside of the framework where I’m approved to do so. As I said before, my concern is not the buyback per se, but what I see as missed opportunities that DO require focusing and cash.

      • Mayson

        The thing is, Apple is not going to do a massive acquisition: at least not one that would substantially increase its headcount, as the primary asset of the company is the culture, and the web of relationships and teams which allow it to produce such massive returns on its R&D dollars. A large acquisition would endanger that culture. Maybe paying whatever premium Nuance would require for a buyout, if it could be done.

        The one possibility that could have been would have been cutting margins to gain share, but they’re having trouble ramping production as it is, so going that way doesn’t look like a very useful idea.

      • Walt French

        The thing is, there are some people arguing a strawman argument that the payout is opposed to — the only alternative to — monster acquisitions or throwing money down ratholes of aQuantive type deals.

        You might get that opinion by reading others’ responses to me, rather than the what — three? — times I’ve said I’m not worried about the buyback or dividends.

        I’m saying I don’t see the sustaining investments that seem kinda obvious. (I take it for granted that we won’t see the disruptive businesses until the whole world does.) And that while we’ve touted Apple’s culture — its processes, org structure, etc — as fundamental to who it is, these missing investments suggests Apple is being so deliberate, maybe even fussy that they’re missing the forest for the trees.

      • Sacto_Joe

        Good reply, Walt, and I agree with much of it. I agree that the true value of Apple is to be found outside its dividend and rests in its preternatural ability as a serial disruptor to continually find ways to delight its users. But referring to your analogy of the assistant (and I haven’t seen Red but will look out for it – thanks!), the point of true art can’t be production. That way lies commercialization, often the death knell of art.

        I guess I see us investors as just people lucky enough to be along for the ride, like people lucky and/or enlightened enough to have bought great art at a bargain. And while some of us understandably are anxious to see Apple achieve the value we believe it deserves, the uses of its cash will IMHO not materially affect the journey to that valuation. Indeed, it seems to me that, contradictorally, an obsession with Apple’s cash may actually be part of what’s dragging down Apple’s stock price, because investors have lost sight off what it is about Apple that is so special. As I said in a post on 2.0 today, it seems like investors are fixated on the wonder of all those golden eggs, and have completely forgotten about the goose that’s laying them!

      • mieswall

        Great discussion Walt, Joe. Keep going.

      • Walt French

        Great discussions need contributions from different perspectives.

      • David Spencer

        Interesting metaphor, but incomplete. Apart from stock options and/or RSUs, a company can’t own its own stock, so the shares are “retired”. In other words, the artist didn’t keep the paintings he bought back. He burned them.

  • echotoall

    Apple announced the increased buyback on 4/23. The stock did not trade above $460 since 4/23. Unlikely the ave repurchase price is 488.

    • Tatil_S

      They probably bought more than 33 million shares, but they are retiring only that many. They could be using the rest for RSUs and stock options.

      • dajhilton

        But is it a ‘buyback’ if they don’t retire the shares? using purchased shares for other purposes that substitute for expenditures does not seem consistent with the second buyback announcement (though it is with the first).

      • Tatil_S

        Usually tech companies issue more shares for RSUs and options, so they could retire the buybacks and issue new shares, yet the net effect on the number of outstanding shares would be the same. Maybe, I missed your point?

  • ptmmac

    There is also a positive emotional component in the share repurchase because it shows that mangement believes in its own pipeline. There are huge organisational costs associated with large aquisitions. The culture and personel of the acquired company effect the long term culture of the purchasing company. Much of Apple’s unique value lies in the culture and personel in the company. Disruption depends very much on culture for sustenance. Another aspect is Steve Jobs admonition to limit the number of projects handled by management to keep the emphasis on quality. Share repurchases over the last 10 years would have cost way less than $480 per share. Apples periodic release of new products greatly enhances dollar cost average purchases.

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  • Chaka10

    There seems to be some confusion on how an ASR works and the share count. I offer a summary below:

    Under an ASR contract, the Company purchases a stated amount of shares (call it 23.5 mm) for a stated price (call it $12 bb) from an intermediary bank. The 23.5 mm shares are delivered and $12 bb price is paid up front. The Company recognizes this right away as a repurchase on its accounts.

    The bank now has $12 bb with which it can cover its 23.5 mm short position through open market purchases during the ASR period. Obviously the actual cost of open market purchases of 23.5 mm shares may be higher or lower than $12 bb, in which case the difference is trued-up at the end of the ASR (so called “settlement”). Thus the bank has no real market risk (unless specifically negotiated and built into the contract), and is really paid a fee for facilitating the repurchase program. This part of the deal is effectively a “forward contract”, and is accounted for as such (but we don’t need to get into that to understand the ASR).

    The settlement mentioned above can be made in cash or shares, i.e., if the bank is able to buy the 23.5 mm shares it has delivered to Apple for less than $12 bb — which is the same as saying that the bank could purchase more than 23.5 mm shares with the $12 bb –, then Apple can request delivery of the difference in additional shares. That’s what happened with the first ASR — Apple paid $1.95 bb and received 2.6 mm shares ($750 a share), which was completed and accounted for in F1Q13. Obviously it didn’t cost the bank $750 a share on open market repurchases, and thus, when the repurchase period for that ASR ended in April 2013 (i.e., the June quarter), Apple received an additional 1.5 mm shares, i.e., total 4.1 mm shares and average repurchase price of $478 (as disclosed in Apple’s 10-Q).

    As you can see from the summary, the basic features of an ASR (as opposed to OMR) are (a) the Company gets to complete and retire shares right away based on an estimated price and (b) the actual repurchases can continue over months through open market repurchases, with a true-up on the cost at the end. (Thus it is a bit of “cake and eat it too” financial engineering.)

    To summarize, as disclosed in the 10Q, Apple’s share repurchase program totals $60 bb, of which $18 bb has been used as of end of the June quarter. The $18 bb consists of $1.9 bb in the first ASR, $12 bb under the second and $4 bb of open market purchases. The $1.99 bb was accounted for in F1Q13, thus the $12 and the $4 adds up to the $16 bb mentioned by Oppenheimer for the June quarter. Total shares retired in the June quarter is 34 mm (not 36 mm), i.e., 1.5 from settlement of the first ASR, 23.5 delivery under the second ASR and 9 mm in OMR. The benefit of the 34 mm reduction is mitigated by any employee issuances of course, and “diluted shares” for EPS purposes is calculated on a time-weighted average basis, i.e., the full impact of will be felt in the September quarter “before any further buybacks or any issuance to employees” (I assume this is the 11 mm share benefit to which Oppenheimer was referring).

    • Secular_Investor

      Thanks Chaka10 for a clear explanation

  • Chaka10

    On balance, it feels like management believes AAPL is cheap below $500. No surprise to the Apple bulls, I’m sure, and I share that only as a candid thought (please do not take it, or anything else I post, as investment advice one way or other).

    • Sacto_Joe

      They’re right. It is cheap below $500/share.

    • DarwinPhish

      At $500, Apple’s dividend yield is still twice its borrowing costs. If management thinks it can maintain its divident payments and interest rates remain low, the stock is cheap even @ $700/share.

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  • Shawn Dehkhodaei

    I believe Apple should buy way more of its shares back …. in fact, I prefer if they were privately held … they would do SO MUCH BETTER in terms of market perception. Wall Street is always looking to toy with some giant company to maximize their profits. The less leverage you give to Wall St., the better off you are.

    • Walt French

      I wonder what “market perception” you’re talking about for private companies. Unless the “market” is the product market (where sales, surveys and the like are the way to measure perception), you wouldn’t find any research pieces on Apple at all.

      Note that not all publicly-traded companies necessarily are beset by second-guessing. With Google utterly controlled by its three founding principals, advice is easily seen as wasted hot air. In contrast, Dell is up for grabs and getting all sorts of attention, much of it unwelcome by the Board.

      I think that a commanding reason for all the free advice Apple gets is that Jobs resigned as CEO almost two years ago, and outsiders who think of a company as being the CEO recognize that Cook is not Jobs (big duh…). Understanding how Apple actually works internally is quite a bit harder — Cook again declined the opportunity to expound on it in the call — and so bloggers lack any reality check unless they look into the structure the way that Horace and Lashinsky do.

    • nuttmedia

      Lack of an equity component to compensation would severely hamper Apple’s ability to attract and retain talent.

      • Sacto_Joe

        If Apple really were to go private, it would still be owned. The lack of stock compensation would merely shift to the owners reducing their income by the amount necessary to attract and retain talent. At $40 billion a year of profit, I don’t think they’d have a problem coming up with adequate compensation. And that’s this year. It would presumably take them ten years or so to pay off the purchase price. In ten years, they might well be making $80 billion/year.

        BTW, I am of the opinion that the sheer size of Apple’s fortune has completely bliinded the investment community to a basic realization: That that present fortune is inconsequential next to Apple’s proven ability to create serial disruption. They are literally spellbound by the wonder of the golden eggs, and totally overlooking the goose that is laying those wonders!

      • nuttmedia

        There is more to equity comp than how you are thinking (tax implications, vesting, upside potential).

        Competition for talent in SIlicon Valley is fierce and as a mature company, Apple is already at a stark disadvantage.

  • The ASR math is not going to be correct. Only open market. You can’t figure out the average price of an ASR. There are premiums involved, forward contracts etc..

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  • Warren Gallagher

    Interesting that Google’s 16 acquisitions this year total something on order of $1.31 billion.$966-million-in-waze-acquisition/

  • BongBong

    Kickstarter! 😉

  • Sam

    So current shares outstanding (end of Q) would be closer to 910m?

    • John

      A bit over 908m per balance sheet

  • mostlyfreeideas

    I think Apple should buy Dell, shut it down, and return the remaining cash to itself (the shareholders).

  • neutrino23

    It is kind of curious that taking this many shares out of circulation didn’t move the share price more. This is about 3 or 4 days worth of volume. I guess it says that there is still a large pool of shares that are constantly in play as opposed to those held as long term investments.

  • Karthik

    Wow. What a polar opposite to AMZN. Horace, what do you think of AMZN’s way of growing value (investing > 95% of earnings back in the business year after year).

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  • Scott Sterling

    Horace, I didn’t know where to post this question, so here it is:

    I think today’s sales analyses use an overly broad “Smartphones” category that lumps together phones which really shouldn’t be lumped together, considering their level of capabilities. Consequently the sales data is less useful, even misleading.

    I suggest that Smartphone sales analyses should use categories of Average Selling Price as a metric.

    Something like this: Smartphones ASP <$200; ASP $200-300; ASP $300-400; ASP $500-600 and finally ASP $600 and above.

    That would actually provide meaningful and useful data about smartphone sales and usage. What do you think?

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