The news that Apple is nearing a $3.2 billion acquisition to buy Beats Electronics is one of the biggest business stories in the nation. The potential deal has received so much attention because it would be Apple’s biggest acquisition ever. It would push rapper and music producer Dr. Dre’s net worth to an estimated $800 million or so. It has already sparked a vigorous debate about Apple’s strategy in the music business and the future of streaming music.
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But there is something else going on here. There is a hugely consequential battle underway for Apple’s cash that will produce some massive winners. Apple has an absolutely enormous amount of cash. Its cash horde now stands at some $150 billion. As Apple started to accumulate this unprecedented treasure chest last decade, CEO Steve Jobs stubbornly refused to spend any of it. A unique and extraordinary man, Jobs built what at one point was the world’s biggest company by market value by urging people to “think different.” He consistently baffled observers by resisting calls to spend his company’s money, saying on a conference call in 2010 that “we’d like to continue to keep our powder dry.”
Since Jobs passed away in 2011, the calls for Apple to do something with its cash have grown stronger. As the company’s cash on hand kept growing, it became inevitable that Apple CEO Tim Cook would need to put the money to work one way or another. The loudest call for Apple’s cash has come from some of the company’s shareholders. They want it. Billionaire hedge fund manager David Einhorn, whose Greenlight Capital hedge fund owns Apple shares, last year publicly lobbied for Apple to return some of its cash to shareholders, saying Apple was behaving like his grandmother and had adopted a “depression-era mentality.” Einhorn put forward a proposal that Apple should issue perpetual preferred shares that he called iPrefs, which would pay dividends to its owners. Einhorn even sued Apple at one point, but eventually dropped the lawsuit after winning a favorable ruling.
Next up, billionaire activist investor Carl Icahn made Apple his biggest single stock holding and started agitating for the company to repurchase a large number of its shares. At one point, Icahn had a dinner with Cook and said he wanted a $150 billion stock buyback. “It’ a no brainer and it makes no sense for this company with their multiple being so low not to do a major buyback,” Icahn said in October. He submitted a non-binding shareholder resolution to push for a $50 billion buyback, but by February 2014 he abandoned his effort. But Icahn, Einhorn and the other investors clamoring for Apple’s cash helped push the company to return capital to shareholders in a serious way. Apple is now in the process of returning $130 billion to shareholders via dividends and buybacks by the end of 2015.
But Apple’s potential deal for Beats has now made it seem possible that people who are not Apple shareholders could be the biggest winners of a Cook spending spree. As Peter Kafka of Re/code noted after the Financial Times first broke the news of the deal talks between Apple and Beats, “if the Beats deal means Apple has changed its perspective, Silicon Valley deal-making may get much more interesting.”
Apple has consistently avoided making big deals in the past, but if the Beats transaction means Cook is ready to go into deal-making mode, the trickle down effect in the tech world could turn into a flood. Facebook recently turned Jan Koum and Brian Acton into billionaires by buying the messaging service they founded, WhatsApp, for $19 billion. Jim Goetz and his venture capital firm Sequoia were the big financial backers of WhatsApp and their funds will get some $3 billion from the deal, the largest venture capital exit of all time.
It makes sense that Silicon Valley would get excited about Apple and its mountains of cash joining the deal-making fray. Marc Andreessen, co-founder of one of the most powerful venture capital firms in Silicon Valley and a prolific tweeter, took to Twitter after news of the Beats talks broke to point out that Apple produces about $1 billion of cash a week and could generate the cash to pay for the Beats acquisition in three weeks. “Question is not why are they being aggressive in buying Beats; question is why are they so conservative on not buying everything else?” Andreessen tweeted. When I replied to Andreessen that, as a Silicon Valley venture capitalist, he “would not mind if Apple started buying up everything in sight,” Andreessen scolded me to try “engaging on logic instead of ad hominem.” When hedge fund manager John Hempton tweeted that Andreessen’s comments were “said by someone with plenty to sell them,” Andreessen took a friendlier tact. “Sorry, I can’t quite make out what you’re saying, I’m heading into a parking garage,” he replied.
For now, the biggest early winners of the battle for Apple’s cash could very well be Beats co-founders Dr. Dre and Jimmy Iovine, and Bill Conway and David Rubenstein, the billionaire private equity co-founders of the Carlyle Group, the private equity firm known for doing leveraged buyouts of government contractors and industrial companies that uncharacteristically invested $500 million in Beats last year. If Apple goes on an acquisition binge, investment bankers will win no matter what Cook buys.
In some ways, the man who has the most at stake is Tim Cook. For Cook, the direction where Apple’s cash flows will certainly help define him. One of the most important jobs of most CEOs—perhaps even the most important—is determining how the excess cash that is generated by their companies is spent and allocated. Maybe Apple will invent a killer television set. But just as likely, Cook’s cash decisions will determine his legacy and shape the future of Silicon Valley and the technology sector for a long time to come.