Ex-CEO John Sculley: Apple smart to take on more debt

“Apple’s move to tap the bond market, despite sitting on a hoard of cash, will give the tech giant flexibility, former CEO John Sculley said Tuesday,” Katrina Bishop and Seema Mody report for CNBC.

“‘It’s probably a smart thing to do, the access to capital is good. And as we say in the high-tech world: You raise money when you can,’ he told CNBC at the Web Summit tech conference in Dublin,” Bishop and Mody report. “Apple held calls with debt investors on Monday about a potential bond sale, part of which would be denominated in euros.'”

Bishop and Mody report, “‘I think it will just give Apple more flexibility to things they want to do in the future. They can buy their stock back; they can do other things with it,’ Sculley said.”

Read more in the full article here.

MacDailyNews Take: Even a vapid-eyed northern bozo can be right once and a while.

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Pundit: Tim Cook is not only a pale imitation of Steve Jobs but a low-rent version of John Sculley – April 24, 2013
Failed Apple CEO John Sculley: If I were Samsung, I would tap Ron Johnson – April 10, 2013
If John Sculley says Apple must do this then Apple probably shouldn’t – January 17, 2013
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John Sculley: I wish I told Steve Jobs ‘This is your company, let’s figure out how you can come back and be CEO’ – Septemeber 13, 2011
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42 Comments

            1. The true beneficiaries of exorbitant corporate tax rates are the banks, as they are able to extort loans that are cheaper than forcing successful companies to pay repatriation to access their own money.

              Surprise.

          1. The REAL issue is that Apple should tell the greedy Wall Street bastards that it is NOT going to do larger dividend payments OR stock buybacks than it can afford from its U.S. cash. NO MORE BORROWING JUST TO FEED WALL STREET.

            Then maybe Wall Street will put pressure on the U.S. Congress and the Executive Branch to change the tax laws or do a limited period of lower taxes so companies, like Apple, can bring that cash into the U.S.

            Apple borrowing — especially European borrowing — is just plain stupid. Sculley being a supporter of this action just proves it.

            1. Why would Wall Street bankers ask anyone to pass laws that would or could reduce the need to borrow?

              The USA is a debt economy. Of course it’s “smart” to borrow. Borrowing money increases GDP whereas saving money decreases GDP (loans and interest on them are products to sell).

              By not borrowing, Apple is putting pressure on US economic growth.

              so, don’t hold your breath waiting for any law reducing repatriation tax.

      1. BS. The money is not “in jail”. Apple can transfer assets around the world with impunity. No, it can’t move piles of cash to the US without a tax implication, but it can:
        – create more US production facilities
        – hire more US workers
        – import raw materials to the US
        – build more Apple stores
        – invest in more R&D
        – distribute employee bonuses or benefits
        – buy or build key suppliers in the strategic move to eliminate IP theft
        – expand its global operations
        – improve its training (i.e., offer more classes at Apple stores or in retreats like the popular Mac cruises)
        – spend more on marketing or advertising (which are different functions, both of which Apple has not done as well lately)

        In short, money that Apple reinvests in itself is NOT taxed. If it just hordes cash, then that money is removed from the global economy and it becomes a target for both the taxman and the scummy investors who think that everyone’s job is to feed them insane trading profits.

    1. Please note that Apple is not borrowing money from banks; Apple is selling [Euro] bonds in Europe.

      Bond issuance is basically borrowing money from the public (in this case European investors for the most part), and typically at a very low interest, like in this case (given Apple’s credit rating).

      To issue bonds in Europe, Apple does not have to repatriate its cash to the U.S. so, the thing about the corporate tax is a mute point here for the most part.

      The idea is very simple; “why use your own cash (which may be more expensive/risky for whatever reason) when you can borrow money at a very very low cost (interest rate is locked) and, you can use that money for something else more profitable right now and in the near future?”.

      1. okay, but Apple is still borrowing money, correct? And they will pay interest on that borrowed money, correct? Where does the money to repay these bond notes to European investors come from? You are saying they require no overseas (from US) money repatriated to repay those notes?

        1. Let me give an example using the figures from this other news item, but I will use the dollar equivalent:

          First, the money Apple will have to pay out (assume for simplicity, the whole $3.5 billion is at 1.7%):

          59.5 million interest pay out (0.017 * US$3,500 million)

          + 3,500 million borrowed money

          = 3,559.5 million total to be paid (in TWELVE years!! from now)

          Second, a very simple easy to understand case of money usage:

          US$3,500 million INVESTMENT in Apple shares (not buyback) at current price(s) (say $100 per share for simplicity), that is 35 million shares.

          Apple share price goes up to, say $150 per share in one year (conservatively because I expect it to go up to $200)

          That investment makes:
          US$16.45 million in dividends every quarter ($65.8 million in ONE year, already more than the interest payout for the bonds) (remember those dividends come from profit distribution to share holders, currently $0.47 PER SHARE)

          US$5,250 million selling all those shares bought a year before.

          So, in ONE year, the original US$3,500 million becomes US$5,315.8 million, WHETHER MADE IN THE U.S. OR IN EUROPE, it would not matter because, again, to pay out the debt Apple would not have to repatriate money.

          Apple to borrow cash in euros, plans to raise $3.5 billion in euro debt

      2. “the thing about the corporate tax is a mute point here for the most part.”
        the phrase is more correctly states as a ‘moot point’ not ‘mute point’
        moot point: definition; adjective
        1.
        open to discussion or debate; debatable; doubtful:
        a moot point.
        2.
        of little or no practical value or meaning; purely academic.

  1. As someone who has had to do a lot of borrowing over the years to realize my dreams, I’m not a stranger to (nor afraid of) the banking system. Without it, many of my ideas would not have gotten off the ground. While not happy to share profits via interest, that profits simply would not have been there without that outside investment.

    All of that said, and even knowing why these are good business moves for Apple in fairly great detail, I still can’t help but find it absurd that our economic system is set up in a way that it makes good sense for an extremely profitable entity to borrow money.

    In a big picture sense, it just doesn’t seem quite right!

    1. Please elaborate (in fairly great detail) why this borrowing from European banks is a good business move for Apple. Assuming Apple pays off these notes, are they not simply burning money in interest when they have the cash readily available to them in their own “vault”? It smells like extortion or pay-offs to me.

      1. Yes, extortion by the US government which is one of the only governments which double taxes international companies.

        Most governments tax income in their own jurisdiction, but not outside of it. So once taxes are paid on income at its source, international companies can move their money around as they need to.

        The US wants to take a second tax on income coming into the US, so companies have to do gymnastics to avoid an unfair, and unusual practice of our government.

        1. Double tax is not exactly correct… as I understand it, US taxes the remainder of the difference between the foreign tax rate and the US tax rate. If the US tax rate is 30%, and Apple has payed 25% on French sales and wants to bring that profit back, they will have to pay the US an additional 5% (I made those numbers up as an easy example, they are not correct). So if it costs less than 5% to borrow money, it makes financial sense to do it. As it is right now, Apple is holding those extra funds aside in case it ever does have to pay repatriation. If they ever get a tax holiday, that extra money is a nice windfall.

          1. Yes but in the case of the EU it is apparent that Apple has been funnelling their profits across the EU through Ireland which has deals below 10% corporate tax and therefore the repatriation level would be an additional 20%. On that basis borrowing new, clean money and bringing it into the US – without a tax deduction is going to be a lot cheaper at current market rates

          2. Well you are right, its not exactly a double tax, but it is till not the practice of other countries for obvious reasons – each country sets its own tax level, and governments compete to provide reasonable tax levels.

            Except the US which “levels” the playing field by attempting to tax income in other countries up to our tax level, even when the money was not earned here.

            Obviously it does not work, as trillions of dollars of US companies’ profits are stored elsewhere and never come back here to be invested and create jobs.

  2. You know what MDN, I’m getting a little weary of all the negative name calling you usually throw out there towards perceived Apple antagonists. You need to chill out a little bit. Yes, John Sculley is not the smartest man in the world, the sharpest pencil in the box, etc., but if we want to be truthful, if Sculley, Amelio, etc. don’t come on board, and things don’t happen through the course of history they way they do, Apple isn’t the company it is today.

    Steve’s ousting from the company is INTEGRAL to it’s success. It focused Steve even more than he already was, and helped him develop the skills he needed but didn’t have at the time, to create the Apple we love. I would argue Steve leaving was the BEST thing for Apple. It certainly sucked going through those years, but it paid off in the end.

    If you really want to blame anyone from Apple for ultimately being an idiot, then you need to blame Steve. I’ve been with Apple since 1986. I’ve never owned ANYTHING other than an Apple product. My first Mac, a 512K Plus, then SE, then IIci, etc. I’ve spent more money on Apple products than I can count over 28 years. Some good products, some great. They have never let me down, even when Steve wasn’t at the helm. Steve is the ultimate idiot for not taking care of himself.

    When the time came to make a smart decision, one that would be best for his health, his and his family’s well-being, and for the future of his company, he punted in the name of his b.s. buddist, or whatever beliefs in the power of herbal/mind healing mumbo jumbo, etc. By the time he wised up, it was too late. Sculley and Amelio didn’t kill Apple’s shine. If anything, their idiocy made it shine brighter when it did. The shine on Apple has dulled because Steve ultimately made another bad decision. One that cost him his life.

    So lighten up a little bit. Enjoy history for what it is and was. There’s no need for “vapid eye northern bozo” comments. It just makes him look more mature than you. Both men are important for other insanely great reasons. At least give them some credit.

    1. I also find the negativity here reflects poorly on the commenters. In what way are the negative commenters or MDN smarter than Scully? What companies have they run?

      These commenters are not even close to as smart or successful as he is, despite his ups and downs and mistakes.

      My focus is on understanding what Apple is doing right. Everyone makes mistakes, that is not even surprising. But Apple is doing a surprising number of things right.

    2. The truth is, both men have been successful in careers after Apple. In fact, Amelio, who’s often seen as a bigger boob than Sculley, started a company with none other than Apple co-founder Steve Wozniak. Does that me we should persecute Wozniak for being an idiot too? I don’t see MDN or other commenters doing any such thing. Everyone makes mistakes, and often the wrong people are hired for the wrong jobs. But again, Apple’s current position doesn’t happen if both of these men don’t play their part in history. John let’s Steve go, and Gil brings him back. Doesn’t matter how it happened, what matters is that it did!

    3. @Craig, Very good points and global-view observation. My “negative” post above is a bit reflexive, and in my view I felt Sculley is/was inclined to priotitize the financial aspects and not enough of the product/operational side. I’ve am am protective of Apple against the monied interests and am inclined to react when another “analyst” makes strong comments, despite his heavy input (good and not so-good) into making of Apple

  3. Stock buybacks are stupid.
    From Joe Nocera in the NYT about gasbag Carl Icahn:
    “As for Apple, in the late 1980s and early 1990s, when John Sculley was chief executive, the company spent $1.8 billion buying back its own stock. That was money it could have really used when the company then stumbled and needed to issue junk bonds — and issue $150 million in convertible preferred stock to Microsoft — just to survive.”
    A commenter put it best:
    Bill New York 10 days ago
    “If Mr Icahn REALLY believes Apple stock is undervalued by half, he should spend every spare penny he can find buying it. The fact that he does not says everything about his motivations.”

    Stock buybacks are stupid Wall Street Banker tricks that do not benefit the long term interests of the company or it’s investors.

    1. Stock buybacks mean investors who want to hold end up with more of the company than investors who don’t. In what way is owning more of Apple not benefiting?

      Also, Apple has a pile of cash, they need to do something with it or its low return will drag down the return of the whole company. But they need to invest it something with the return of Apple or higher, or again it is just dragging down value growth. If there isn’t an opportunity to buy something more valuable than Apple they should buy up Apple.

      In the meantime, Apple is spending fortunes on capital expenditures, research and acquisitions. They are not being overly frugal. It just happens they are so profitable they cannot spend all their money like that.

      1. There is not a direct relationship between stock buybacks and increased stock price- actually the number is not very good.

        The money would be better spent investing in the company- growing the business.

        Steve Jobs got asked every year about dividends and buybacks and he always deflected the questions saying some variant upon his job was to make shareholders money by GROWING the company. Manipulating the price by stock buybacks is not productive.

        1. You would be right except Apple is making so much money it could not possibly be spent well.

          Look at how Microsoft and Google reinvest vast sums of money … followed by multi-billion dollar write offs as their investments don’t pan out.

          It is a very good thing Apple is doing what it does. And in the long run (and that is what counts), the buybacks do matter. It raises earnings per share. The fact that buybacks are often not reflected in the stock price quickly is a buying opportunity.

    2. Icahn put billions into Apple. The idea that an investor only believes in Apple if he puts in every penny he has is juvenile hyperbole.

      I don’t think Tim Cook made any decisions because of Icahn, but he did think he was right as evidenced by the buy backs.

      And in this case, Icahn may have shorter time horizons that Tim Cook cares about, but his is getting the word out that Apple is undervalued. That is one way to get the stock price up that nobody in the company can do, and it doesn’t hurt anyone.

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