Posted on 11/11/2009 2:49:00 PM PST by Blue Highway
I've got some sour news for you, Apple (Nasdaq: AAPL) shareholders. It doesn't matter how many iPods you buy, iPhone apps you download, or black mock turtlenecks you wear: Steve Jobs couldn't care less about you.
And that's why -- despite great products, a killer brand, and mouth-watering growth potential -- I would advise against owning shares of his company.
Hey Steve, the Jerk Store called There's plenty of anecdotal evidence to suggest that Jobs is a jerk. Stories of Apple's CEO throwing temper tantrums, berating his employees, taking credit for others' ideas, and even parking his Mercedes in handicapped spaces are nothing new. But Jobs' personality flaws are not legitimate reasons to avoid Apple shares. In fact, I don't even mind that Jobs is a jerk. After all, there is a long list of corporate leaders who managed to create significant shareholder value despite seriously deficient personalities -- from John Rockefeller to Henry Ford to Microsoft's (Nasdaq: MSFT) Steve Ballmer.
Rather, I mind that the Apple CEO has demonstrated a pattern of decidedly un-shareholder friendly behavior over the years, and with his company's stock trading for $200 per share, that's a risk that I'd rather not incur. Here are three prime examples of why I think Jobs' decisions have been detrimental to his shareholders:
1. All about Steve In early 2000, along with a fancy private jet intended for his personal use (total cost to shareholders: $88 million), the Apple board gave Jobs an options grant allowing him to purchase 40 million (split-adjusted) shares at $21.80 a piece. According to Bloomberg, "the strike price of that grant was equal to the lowest closing price of Apple stock in the 56- and 30-calendar day periods preceding the grant and in the 30- 56- and 90-day periods following the grant."
In case you're tempted to chalk that convenient strike price up to chance, remember that during Jobs' stint as CEO of Pixar (now a part of Walt Disney (NYSE: DIS)), key executives received options grants priced at the stock's yearly low in 1997, 1998, 2000, and 2003. A Merrill Lynch analyst placed the odds of that happening purely by coincidence at one in 112 million.
I don't begrudge Jobs receiving high compensation. He has created a lot of value for Apple shareholders over the years, and deserves to be compensated accordingly. But I would prefer that compensation to be commensurate with the value that Jobs creates, preferably in the form of restricted stock units awarded if Apple achieves predetermined performance-based criteria. Backdating stock options enriches executives independently of their performance -- since the bar is set so low, and at the expense of shareholders -- since the company ultimately foots the difference.
Of course, alignment with his shareholders' interests has historically not been much of a concern for Jobs. After Apple's stock plummeted during the dot-com crash, Jobs went back to the board and demanded another options grant, giving him the right to purchase 15 million (split-adjusted) shares at the new low price of $9.15 a piece. Apple shareholders did not enjoy such a luxury when the value of their holdings declined.
According to the SEC, Apple went to extraordinary lengths efforts to disguise the details of these options grants (including allegedly creating bogus paperwork and minutes of a nonexistent board meeting). Although Jobs has pleaded ignorance to the accounting implications, former Apple CFO Fred Anderson -- who the SEC forced to repay $3.5 million of "ill-gotten gains" due to his involvement in the options scandal -- insists that Jobs was deeply involved in the decision-making process and had been alerted to the accounting ramifications of his actions.
2. Too much of a good thing Apple has a rock-solid balance sheet, with a $23.5 billion cash hoard at its disposal and no debt. In and of itself, this is a very good thing. However, Jobs has been content to park that cash in short-term investments earning a paltry 1.7% return. That's peanuts.
Smart managers will keep a small amount of excess cash on hand to cushion against the impact of a possible business downturn or fund an opportunistic acquisition. But Apple can easily cover its R&D expenses and off-balance sheet purchase commitments with its free cash flow, and $23.5 billion is enough money to buy a competitor or two, the Washington Redskins, and a medium-sized Central American country.
As partial owners of the company, Apple's shareholders have a proportional claim on that cash hoard. If Jobs does not have a legitimate operational need to maintain such a significant cash balance, he should follow the lead of tech titans like Intel (Nasdaq: INTC) or IBM (NYSE: IBM) and pay his shareholders a dividend, or mirror Cisco (Nasdaq: CSCO) and use some of Apple's copious free cash flow to repurchase shares.
3. Unhealthy disclosure policy Unfortunately, no discussion of Jobs is complete without a reference to his health issues. According to a Fortune article, although Jobs was diagnosed with pancreatic cancer in October 2003, he put off surgery for nine months while he explored a number of alternative approaches. During that time span, he did not disclose his condition to Apple or Pixar shareholders -- in fact, he reportedly didn't even tell the Pixar board.
Rumors of Jobs' health issues resurfaced in 2008, but Jobs dismissed these concerns first as "a common bug," and later as "a hormone imbalance." In April 2009, Apple shareholders were surprised to learn that Jobs had received a liver transplant -- a condition far more serious than the company had led them to believe.
But Jobs' body is Apple's business. Apple's annual report sums it up best: "Much of the Company's future success depends on the continued availability and service of key personnel, including its CEO." This is surely a sensitive issue, but if Jobs is a material factor in Apple's future success then shareholders deserve to know his health status. By withholding this vital information, Jobs subjected his shareholders to significant risk.
Close, but no cigar Over the years, Steve Jobs has repeatedly demonstrated indifference for his shareholders' wellbeing. While his poor stewardship hasn't hurt shareholders too badly yet, I believe it's only a matter of time.
That's why -- despite a strong brand and obvious growth potential -- we passed on purchasing Apple shares at Motley Fool Million Dollar Portfolio, where we run a diversified real-money portfolio populated with the best recommendations from The Motley Fool universe. In addition to business models, competitive advantages, financial statements, and cash flow projections, we spend a lot of time evaluating a company's leadership, and thanks to Jobs, Apple didn't make the grade.
I don’t get this. Would he prefer Jobs just got $50 million a year like other execs regardless of the value he creates? The few large-dollar compensation packages are still tiny compared to the value he created for Apple even up to that time. In 2000, around the time he was complaining about, Apple’s stock had gone up to six times its 1997 value, plus a split.
If he gives me a tablet, he owns me for life.
Sounds like the author has a case of ipod envy!
Not true. As I previously posted, Apple had almost $2B in cash and liquid assets at the time. Apple used the $150 million to increase advertising and for discounts to the education market. Microsoft was undergoing an anti-trust investigation.
In addition to the face saving purchase of non-voting stock, which was an agreement to allow MS to save face, MS had to license certain software copyrights and patents to Apple in perpetuity for no compensation, had to PAY Apple to license the software they had lifted without permission large sums of money each year for five years, and they had to continue support and development of Microsoft Office for Mac for an additional five years. Apple, on the other hand, was required by the terms of the settlement, to license the copyrights and patents for an undisclosed compensation, and include Internet Explorer for Mac along with Netscape Navigator in the MacOS bundle... but not to make it the default. It was a very lopsided agreement toward Apple.
thanks...but where’s your documentation ? My memory was\is a little fuzzy, so my details were probably a little fuzzy...so I’ll start here:
http://news.cnet.com/MS-to-invest-150-million-in-Apple/2100-1001_3-202143.html
your turn.
Wow, battling these false rumors is like playing whack-a-mole.
thanks...
So what have YOU accomplished that makes what you have to say of equal or greater value than what a person who has remade three major markets has to say?
Were people at that lunch there to hear what Steve Jobs had to say, or what everyone else's unaccomplished, untested opinions were? It strikes me that Steve Jobs accomplishments demonstrate that his opinion is far more valuable than anyone else's at that table.
I'd be hanging onto every gem of wisdom (or inanity) that came out of the accomplished person's mouth, hoping to learn something valuable I could later put to use for my benefit.
Your desire to walk away says a whole lot more about your arrogance, and your own perhaps overated opinions on the value of your opinions, than it does about Steve Jobs who has credits to go with his ego.
Clean up:
Jobs was kicked out in 1985 during a power struggle with John Sculley, whom Jobs had hired a couple years before. Remember the famous line, “Do you want to spend the rest of your life selling sugared water or do you want a chance to change the world?”
Sculley screwed up and was replaced by Spindler in the early 90s, who in turn screwed up and was replaced by Amelio a few years later.
Then Apple floundered under Amelio. All attempts to make a new OS were failing, and Amelio bought NeXT. And the company kept going straight downhill under his leadership.
It wasn’t hard for Jobs to convince the board to oust an ineffective CEO.
Actually Amelio wasn’t that bad. The problem is he thought a strict culture and watching the purse strings would bring Apple back. But was a tiny player in the face of Microsoft, and his plans didn’t include much that could differentiate Apple and make people want to buy their products.
Jobs realized that vision and creativity was necessary to bring back Apple, and he was right.
BTW, what’s this about a lack of Apple acquisitions? Apple bought P.A. Semi (low-power chips), Placebase (mapping), Emagic (music editing), Proximity (media organizing) and some software titles. Apple also bought some stakes at other companies.
In addition, Apple’s large cash reserve probably helps them make their half-billion dollar flash memory deals with manufacturers in order to guarantee supply for iPods/Phones.
thanks..i was wrong
It’s in the link you posted. Apple was involved in a Quicktime lawsuit with Microsoft. Apple had 1.2 billion in cash on hand, and MS investment was $150 million. It wasn’t small change, but Apple didn’t need it to survive. The agreement wasn’t MS throwing a lifeline to Apple. They were settling a contractual lawsuit out of court. Part of the agreement was also that MS continue making Office for the Mac, and that Apple would make Internet Explorer the default web browser. In return Apple dropped the Quicktime lawsuit.
This lawsuit created big problems for MS, as they were under DOJ investigation. There was a strong possibility that MS would have been broken up like Bell Telephone was, with the OS and Applications divisions being split into separate companies. MS was fighting for it’s life as much as Apple.
Frankly, Stylin, I've posted the proof umpteen times on FreeRepublic, that I'm not inclined to do it again. This myth is like a hydra. Chop off one head and two more pop up.
The three interlocking contracts that are all part of the settlement, Apple's financials on the date of the so-called "bail-out", and the final tally of who got what in that settlement are available on the internet. It was also reported in numerous other contemporary tech and market journals. Your link is to an article based on Microsoft's face-saving press release that later became the source of the myth that MS "saved" Apple from certain bankruptcy.
Given Apple's 1.4 billion in just cash reserves at the end of their 3rd fiscal quarter of 1997—which ended the month before Microsoft bought the non-voting thee year restricted, preferred stock, another sign of who won and who lost—Apple could have weathered 21 more loosing quarters (five years) before it would deplete those reserves (and they still had about 400 milion in the other liquid assets) and be at risk of bankruptcy.
Um, have you been paying attention for the last year? A 1.7% investment would be a 40 percentage point improvement on what my 401(k) has yielded the last 12 months.
People invest in stocks not only for asset increase but also for a cash return and dividend payment.
If people bought Apple stocks for a dividend, those people weren't paying attention. Apple last paid a dividend in 1995. Having all that money liquid puts Apple in a great position; they could by Best Buy outright and have 6 billion left over, or buy 80% of Dell, if that would gain them anything. If so inclined, they could do that without stock swaps or shopping around for credit.
Stylin, it’s very rare for someone to come back and say they were wrong around here. Very classy, I respect you for that.
I would like to add one little thing. Eisner effectively killed a Pixar extension. He couldn’t stand the general wisdom that the great Disney needed little Pixar more than Pixar needed Disney. He also felt Jobs was beneath him, and pretty much let it be known he felt he was negotiating with an inferior.
That plus a few other things of course angered Jobs to no end.
And in the end Pixar effectively took over Disney. Gotta love it.
It’s a big Internet rumor. Like most, they’re common and have a certain element of believability, given that Microsoft was way on top at the time, and Apple was just about at its lowest.
Actually, while Microsoft did want Internet Explorer included on MacOS distribution disks and all new Macs, making it the default web-browser was not something they were really pressing for... because of the anti-trust lawsuit which heavily involved Netscape's complaints against MS.
What they got was that Apple agreed to include IE (and an e-mail app) for Mac, but they also included Netscape Communicator (Navigator and mail package) in the distribution. Users were allowed to select their browser. MS wanted to show that they weren't being heavy handed in their monopoly position. Most of the Mac users I knew continued using Netscape...
Thread hijack alert going on. Another thing Eisner did when they were knee deep in negotiations for renewal of the picture deal, Eisner held a press conference insulting Apple for their “Rip, mix, burn” ads, claiming they were advocating copyright infringement. That guy was a real piece of work.
By the way, that 1.2 billion CoH reported in the August 27, 1997 article was based on the previous quarter's report... the final report of that current quarter upped that to 1.4 billion dollars. Apple was doing well at that point, although since that figure includes most of September, it might be inclusive of the infusion of cash from the $150 million from MS. I don't know if it does or not, because I'm not absolutely certain of when MS bought the shares, but I suspect so.
Um, no. Jobs was ousted in the mid-'80s. He was not the CEO of Apple -- that was first Mike Marrkula, the venture capitalist Jobs and Wozniak brought in to help launch Apple, followed by a decade of John Sculley, then a brief tenure by Michael Spindler before they brought in Amelio from Intel. Jobs was never CEO before 1997.
Amelio's brief was, indeed, to "get their product strategy back on track," but it was not, as you make it sound, to straighten out a mess left by Jobs. During those years, Apple coasted on the Mac's momentum from the '80s, making incremental improvements as one next-generation OS project after another floundered. Amelio bought out Jobs' NeXT, whose Unix-based OS grew into OS X.
The Jobs effect can be summed up in one word: Vision. From the time Hobs left until he came back, Apple had none. They tried to out-commodity Wintel with a series of lackluster beige boxes and licensed clones. Apple without Jobs had only one innovation: The Newton, which was in many ways ahead of its time, but never really came together.
Gil couldn’t manage the engineers because they were all a bunch of whiners. They wanted Jobs back.
By 1997, there were few engineers who'd ever worked with Jobs. Any who were that adamant about working with Jobs would have gone to NeXT, which was making seriously innovative boxes; though they were never commercially successful, there was one around for Tim Berners-Lee to invent the World Wide Web on.
It may well be the case that Steve Jobs is an egomaniacal jerk. I don't care; I'm not looking for a carpool partner. What I am looking for is constantly improving technology from a company that has the vision to create it and the financial strength to bring it to market, and on that Jobs has delivered in spades.
Same here, Stylin... you are a class act. Kudos to you.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.