I don’t own any Apple stock, but their announcement about what they’re planning to do with their big stockpile of cash caught my attention. Not because I’m going to rush out and buy the stock, but because of Dodd-Frank.
My analysis of when fund managers need to register with the Securities and Exchange Commission has me focused on the composition of a company’s assets. I was skeptical that Apple had those billions sitting in stacks of $100 bills in a vault at the Apple headquarters. Some of it had to be invested in securities.
Under the Investment Advisers Act you need to register if you are providing investment advice about securities. Apple is in the business of making shiny gadgets and driving tech-boys into slather over its latest product. Is that still true when the company is sitting on an enormous pile of cash and securities?
I decided to take a look at the balance sheet in Apple’s last 10-Q and broke it out into assets and securities.
| Assets | Securities | ||
| Cash and Cash equivalents | 9,815 | ||
| Short-term marketable securities | 19,846 | ||
| Accounts receivable, less allowances | 8,930 | ||
| Inventories | 1,236 | ||
| Deferred tax assets | 1,937 | ||
| Vendor non-trade receivables | 7,554 | ||
| Other current assets | 4,958 | ||
| Long-term marketable securities | 67,445 | ||
| Property, plant and equipment, net | 7,816 | ||
| Goodwill | 896 | ||
| Acquired intangible assets, net | 3,472 | ||
| Other assets | 4,281 | ||
| 41,080 | 97,106 | ||
| 138,186 | |||
| 70% |
About 70% of Apple’s assets are in securities. That made me think of my analysis of whether you are an investment adviser. Apple could be a hedge fund. They have more in securities than they do iPhones.
Under Dodd-Frank, the definition of private fund is taken from the definition of an investment company in the Investment Company Act. Part of that definition is that the issuer
owns or proposes to acquire investment securities having a value exceeding 40 percentum of the value of such issuer’s total assets (exclusive of Government securities and cash items) on an unconsolidated basis.
Apple is above that 40% level, so I took a closer look at Apple’s breakdown of its securities:
| Cash | 3,956 | |
| Money market funds | 3,495 | |
| Mutual funds | 1,238 | |
| U.S. Treasury securities | 14,685 | |
| U.S. agency securities | 20,000 | |
| Non-U.S. government securities | 5,251 | |
| Certificates of deposit and time deposits | 3,837 | |
| Commercial paper | 1,518 | |
| Corporate securities | 38,914 | |
| Municipal securities | 4,078 | |
| Asset-backed securities | 549 | |
| Total | 55,043 |
That $55,043 happens to represent 40% of 138,681. I would guess that Apple is very aware of that 40% threshold to be considered an investment company and is purposefully keeping its allocation among securities to not go above the 40% threshold.
Because Apple has kept itself below the 40% level you don’t need to address the second prong of the test: whether Apple “holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities.”
So, the answer is “no.” Not because Apple is technology company, but because the company is purposefully managing its portfolio of securities to stay outside the definition.
