Post-2012

By late 2012, Apple stockholders and devotees were growing restless since the company had produced no new ground-breaking devices since the iPad in 2010. The stock price had con- tinued to fall from its September 2012 high. Apples market share in the phone and tablet in- dustries has been declining significantly, owing primarily to Android-powered devices. While Apples cash had grown over the previous decade, shareholders began to worry that it wasneither spending it nor returning it to stockholders. While some regard Apples cash collec- tion as a testament to SJs paranoia, the fact that Apple could amass so much so quickly is owing to their high profitability, cost reductions, andefficient capital use.

TC asserted that Apples reluctance to return funds was not motivated by a fear that share- holders would view itnegatively. He reassured shareholders that financial returns would not constitute a white flag for innovation. As SJstated on Apples 2010 Q4 earnings call:

"We are confident that we will be able to grab one or more incredibly strategic opportunities. I feel we have a solid track record of cash management discipline. So we wont be tempted to make unwise purchases. To keep our optionsopen. Thats the main reason.".

As indicated by their quarterly earnings calls, several shareholders got upset with Apples tight-lipped approach tomanaging its extra cash. Below is an excerpt of a call:

Mark: Regarding the use of cash, is it any different from what youve done in the past? Are you thinking moreproductively about cash than you have in the past?

PO: Weve always talked about cash internally and with our Board. The cash balance is improving for the correct reasons, and I would classify our discussions today as active in choosing the best course of action. We have nothingto announce today.

Marl: Is there a deadline? Will you actually inform us when youve concluded those discussions?

PO: When we have something to announce, we will. I emphasise that we are actively debating the best use of our cashbalance.

David: Could you give us a sense of what youre thinking? Dividends and buybacks?

PO Were investigating all possible uses, however, I have nothing to share with you today.

The US authorities were also interested in Apples cash management methods, seeing it as proof of corporate tax evasion. The Senate Permanent Subcommittee on Investigations called Apple to testify on offshore profit shifting, suggesting moving revenues to a low-tax foreign refuge was not enough - Apple sought the holy grail of avoidance bysetting up offshore com- panies worth billions of dollars and claiming tax exemption in every jurisdiction.

Offshore Funds

Apples global activities necessitated the creation of a multi-tiered organisational structure. Their cash was primarilyheld in Ireland, which has a low corporate tax rate. Profits earned by American corporations abroad are taxed in theUnited States, but only after they are repatriated to the country. Repatriation tax is the difference between the US rateand the local foreign tax rates. If foreign income were never taxed, this rate might reach 35%. Numerous Americanbusinesses retain international profits as a result of these advantages. Given that around 69% of Apples cash is heldabroad, a repatriation tax of 35% on all of their foreign reserves would equal to slightly under one-quarter of theirentire cash reserves.

In the US, a corporations tax residence is established by its physical location. This means that neither the profits of Apples international companies nor the profits transferred from these subsidiaries to Apples Irish subsidiaries are taxed by the US government. On the other hand, Ireland determines a companys tax residence based on its controllinglocation. Because the Irish subsidiaries are managed by executives based in California, their profits are also not taxed by the Irish government. This means that three of Apples subsidiaries do not have a tax residence. Apple officials stated that these international divisions were necessary due to the companys broad international operations: In 2012,foreign earnings accounted for 61% of Apples revenue, while around 69% of total cash was retained overseas. Despite accusations, Apple maintained that it pays all applicable taxes domestically and internationally.

According to Apples evidence before the Senate, Apple was arguably the highest corporate taxpayer in the US,paying $16 million every day. In other words, Apple paid around $1 of

every $40 in corporate income taxes collected by the US Treasury in 2012.

Dividends and Share Repurchases

Apple declared a quarterly dividend of $2.65 per share in March 2012, coupled with a $10 billion three-year sharerepurchase program. According to PO, Apples share repurchase pro- gram and dividends would cost the company $45billion in domestic cash over the next three years. This was Apples first dividend authorisation since 1995. Despite its efforts to bol- ster shareholder trust, Apples stock price has continued to decline from its September 2012 peak, particularly when compared to the NASDAQ index. Despite this initiative, numerous prominent and vocal stockholders remained dissatisfied. Simultaneously, TC was also aware of Apples progenitors fluctuating fortunes,particularly Palm and Blackberry.

Preferred Share - iPref

In February 2013, DE sent an open letter to Apple shareholders urging the company to finally "unlock shareholdervalue" and halt the growth of Apples cash hoard. DE proposed a perpet- ual preferred stock, which he named "iPref."Apple would issue five preferred shares for every common share to all present owners. Each of these preferred shares would have a face value of $50 and would pay a quarterly dividend of 50 cents. DE was well aware of Apples corpo-rate tax situation and ensured that the dividends would be paid by free cash flow. Apple may issue five iPrefs for each common share without depleting its cash reserves. DE anticipated that this five-iPref distribution would unlock $150 invalue for each share, or nearly 33% of the Q1 2013 stock price of $450.50. DE asserted that this was greater than thevalue unlocked by a share repurchase program or a special dividend. The iPref would also resolve the repatriation issueby utilising exclusively free cash flows. With roughly 939.1 million shares outstanding in Q1 2013, the programs first year costs would be around $9.4 billion. Many thought that DEs proposal was a viable solution to Apples dilemma.

Question:

Following the events noted in this case, state what Apple actually chose to do with their cash (2013 - 2014) and any rationale for this decision.