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InvestmentBanking April 30, 2013, 3:26 pm 154 Comments

To Satisfy Its Investors, Cash-Rich Apple

Borrows Money

By PETER LATTMAN and PETER EAVIS

Eric Risberg/Associated PressTimothy Cook, Apple’s chief, said last year the company would
return money to shareholders.

9:00 p.m. | Updated

With a $145 billion cash hoard, Apple could acquire Facebook, Hewlett-Packard and Yahoo. Put
another way, it could buy every office building and retail space in New York, according to city
estimates.

But despite its extraordinarily flush balance sheet, the technology behemoth borrowed money on
Tuesday for the first time in nearly two decades. In a record-size bond deal, the company raised
$17 billion, paying interest rates that hovered near the low-cost debt of the United States
Treasury.

Apple’s return to the debt markets raises a riddle: Why would a company with so much cash
even bother to issue debt?

The answer has a lot to do with the frenzied state of the bond markets. Companies are issuing
hundreds of billions of dollars in debt to exploit historically low interest rates. They are also
feeding strong investor demand for high-quality corporate bonds as an alternative to money
market funds and Treasury bills, which are paying virtually nothing.

Apple’s maneuver, however, also reflects the unusual challenges of a fabulously successful
company with a sinking stock price. Apple is plagued by concerns that its growth may be
slowing, and its shares have plummeted from a high last fall of more than $700 to under $400
last month.

In an effort to assuage a growing chorus of frustrated investors, the company is issuing bonds to
help finance a $100 billion payout to shareholders. Apple said last week that it planned to
distribute that amount by the end of 2015 in the form of paying increased dividends and buying
back its stock. Since that announcement, Apple shares have risen 10 percent, closing at $442.78
on Tuesday

Taking on debt can actually magnify the returns for shareholders and improve stock
performance, financial specialists say. It can reduce the overall cost of the capital that a company
invests in its business. In addition, after a stock buyback, there are fewer shares, which can
increase their value.

Yet even as shareholders and analysts welcome the financial tactics, they emphasize that the
maker of iPhones, iPads and Macs must continue to innovate and fend off increasing
competition. After all, today’s Apple could be tomorrow’s Palm.

“This is a substantial return of cash and it’s the right thing to do on many levels,” said Toni
Sacconaghi, an analyst with Bernstein Research. “But, ultimately, the company has to execute.
This is no substitute for that.”

By raising cheap debt for the shareholder payout, Apple also avoids a potentially big tax hit.
About two-thirds of Apple’s cash — about $102 billion — sits overseas in lower-tax
jurisdictions. If it returned some of that cash to the United States to reward its investors, it could
have significant tax consequences for the company. In some ways, the bond issue is a response to
that tax situation.

“They have been so successful with their tax planning that they’ve created a new problem,” said
Martin A. Sullivan, chief economist at Tax Analysts, a publisher of tax information. “They’ve
got so much money offshore.”

The $17 billion debt sale by Apple is the largest corporate issuance on record, surpassing a $16.5
billion deal from the drug maker Roche Holding in 2009, according to Dealogic.

Apple joins a parade of large companies issuing debt with astonishingly low yields. Last week,
Nike sold bonds that mature in 10 years that yielded only 2.27 percent. In November, Microsoft
set the record for the lowest yield on a five-year bond, issuing the debt at 0.99 percent. In
comparison, the yield on the 10-year Treasury on Tuesday was 1.67 percent, while the five-year
note yielded 0.68 percent.

“If you look at these big companies like Apple and Microsoft doing these big, low-cost bond
offerings, it’s a way for them to raise money in an effort to create better returns for their
shareholders,” said Steven Miller, a credit analyst with Standard & Poor’s Capital IQ. “The bond
markets are practically begging these corporations to issue debt because of how cheap it is to
raise money.”

On Tuesday, Apple issued six different securities, with maturities ranging from a three-year note
yielding 0.45 percent to a 30-year bond that yields 3.85 percent. The largest piece, a $5.5 billion
issue, is a 10-year yielding 2.4 percent. While good for the company, longer-term bonds with
yields this low can fall steeply in price if interest rates go up, hurting investors who hold them.
Still, $3 billion of the Apple debt are notes whose interest rates are periodically reset.

Despite all the cash held by Apple, the credit-rating agencies have not awarded it their coveted
AAA ratings, citing increased competition and a concern that its future product offerings could
disappoint. Moody’s Investors Service gave Apple its second-highest rating, AA1, as did
Standard & Poor’s, rating the company AA+. (Microsoft, Exxon Mobil, Johnson & Johnson, and
Automatic Data Processing have the highest credit ratings from Moody’s and S.&. P.)

“There are inherent long-run risks for any company with high exposure to shifting consumer
preferences in the rapidly evolving technology and wireless communications sectors,” wrote
Gerald Granovsky, a Moody’s analyst.

Apple’s less-than-perfect rating did not drive away investors on Tuesday. The offering generated
investor demand of about $52 billion, according to Goldman Sachs and Deutsche Bank, which
led the sale of the issuance.

Desperate for returns in a yield-starved world, investors like insurance companies, pension funds
and foreign governments have been snapping up corporate debt. Individual investors are also
driving the demand: this year, through last Wednesday, a record $55 billion has flowed into
mutual funds and exchange-traded funds that invest in corporate debt with high-quality ratings,
according to the fund data provider Lipper.

Steve Jobs, Apple’s co-founder and former chief executive, had long resisted calls to dispense
big sums to investors. In 2010, when Apple’s cash stood at $50 billion, he rejected pressure to
make large distributions to shareholders. The company’s cash balance continued to grow after
Mr. Jobs’s death in 2011, as it generated billions of dollars in earnings each quarter. Over the last
12 months, Apple operations have been generating about $150 million of cash a day.

A year ago, the new chief executive, Timothy D. Cook, announced a decision to start returning
$45 billion to shareholders. But that did not satisfy everyone. David Einhorn, chief executive of
the hedge fund Greenlight Capital and an Apple shareholder, pressed the company to do even
more.

The excitement surrounding Apple’s bond deal on Tuesday stood in stark contrast to the gloom
that hung over the company when it last issued debt. In 1996, Apple faced a crisis, with
shrinking sales of its niche computers and a weakening balance sheet that earned a junk credit
rating. In the middle of the year, its shares reached a 10-year low.

“Will Apple Computer run out of cash soon?” asked an article in The New York Times on April
7, 1996. That summer, it tapped the bond markets, raising about $600 million and averting a
crisis.

Later in the year, Mr. Jobs, who had left Apple more than a decade before, returned to the
company.