What to do with $207 billion in cash?

By Bruce Firestone | Business Models

Sep 04

Kind of a nice problem to have, n’est-ce pas?

Well, this is the challenge that Apple is currently facing seeing as it is sitting on a mountain of cash that most of us can only dream about.

CNBC reported in Q1 2020 that: Apple now has $207.06 billion cash on hand, according to the company’s fiscal first-quarter earnings report released on Tuesday. That’s a less-than 1% rise from its fiscal fourth quarter of 2019, when it reported a cash pile of $205.9 billion.

I did a study a few years ago. The huge cash hoards of firms like (Google parent) Alphabet, Apple and Facebook have on hand, have returns of about 1% to 1.5% pa. I suspect today, it’s even lower. There are a lot of smart people at those companies, but I’ve always felt they could do (much) more with those piles of cash.

A real estate investment client of mine writes that he has come up with a plan to “help” these firms; it works something like this–

  1. Company X takes (say) $4 billion from their cash reserves and buys a portfolio of buildings that has a cap rate of 4.5% pa
  2. They pay cash, so there is no mortgage against any of their properties
  3. Presto, they are making 4.5 points on their dough instead of around 1%
  4. They hire my client to find these deals and manage the properties too
  5. If they want to use leverage, they put in place a line of credit against their portfolio, probably at a cost of 1.45% pa these days or even lower
  6. Thus, they are able to replenish their cash hoard
  7. Their IRR (internal rate of return) on their property portfolio is now close to infinite (I do realize, dear reader, that there is no such thing as being “close to infinite”) because their ACB (adjusted cost base) is about zero
  8. This is also (because of the line of credit refi aspect of this model) a “perpetual motion machine” in action

There’s no way these funds can be managed if projects are smaller scale– say $40 million instead of $4 billion. Think about it– you’d need 100 individual $40 million investments to deploy $4 billion in cash, which would be unmanageable.

This model sort of reminds me of what Disney did with the NHL in the early 1990s. Read this excerpt from my Real Estate Handbook, https://brucemfirestone.com/product/real-estate-handbook/, about that–

Accretive Buying

If you think that bootstrap capital is something only startups use, think again. Large firms including the Disney Company use Bootstrap Capital. They did this when then CEO Mike Eisner acquired the Mighty Ducks of Anaheim (now just the Ducks of Anaheim) expansion franchise from the National Hockey League in 1993/94. The franchise fee of $50 million was paid as follows—$25 million to the League and $25 million to the LA Kings (then owned by Bruce McNall). But the Kings were paid $5 million per year for five years, a form of Seller Take Back (STB) financing (or Vendor financing), a prime source of capital for startups.

In addition, Disney got a $20 million leasing inducement from Ogden Corp. (then owner of the Pond, now called the Honda Center where the Ducks play) to sign a longterm building lease. Next, Disney put in place a $30 million line of credit secured by their newest asset (i.e., the franchise itself). Hence, Disney acquired the team for a negative $20 million in cash.

This demonstrates that Bootstrap Capital is often “free” capital. The $20 million dollar leasing inducement that Disney received from Ogden did not require any interest payments and, in fact, there were no principal repayments either. Vendor financing Disney got from the Kings was also, in effect, an interest-free loan for five years.

Free or ultra-low-cost capital can radically change your IRR (Internal Rate of Return) on a project and your ROE (Return on Equity) too. The two most important influencers on a project’s rate of return are—upfront costs and the passage of time. If you can reduce or even turn your upfront costs negative, impacts are substantial.

This can really help an intrapreneur inside an established organization stand out from her/his peers. Say you work at Cisco and you are an intrapreneur who knows how to use these types of self-funding techniques. Suppose you go to your supervisor and say, “I have a project that will take two years of R&D at a cost of $10 million but I have three launch clients each willing to pickup $2.5 million of that cost and take the first six months of production.” It is likely that your idea will get an enthusiastic hearing. More enthusiastic than a colleague who has a competing project that takes the same amount of time to develop and costs as much to bring to market but they haven’t lined up any launch clients or received any hard commitments not only to buy the product once it’s ready for market but to contribute some (bootstrap and free) capital to help develop it as well.

Prof Bruce

FOR REAL ESTATE INVESTMENT AND BUSINESS COACHING THAT’LL HELP YOU PROVIDE FOR YOURSELF AND YOUR FAMILY FOR 3-GENERATIONS, PLEASE CONTACT:

Bruce M Firestone, B Eng (civil), M Eng-Sci, PhD
Real Estate Investment and Business coach
Century 21 Explorer Realty Inc broker
Ottawa Senators founder
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• MAKING IMPOSSIBLE POSSIBLE
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Image source: https://commons.wikimedia.org/wiki/File:Apple_park_cupertino_2019.jpg

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About the Author

Bruce is an entrepreneur/real estate broker/developer/coach/urban guru/keynote speaker/Sens founder/novelist/columnist/peerless husband/dad.

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