Apple has engineered a share buyback that functions much like a leveraged buyout. It has used its cash to reduce its outstanding shares which, in turn, increased the share price. In “leveraging” its cash to repurchase the shares, Apple boosted the value of its outstanding shares. Over the past three years, Apple Inc.’s fully diluted share count has decreased 12% from over 6.637 billion in Q3’12 to just over 5.83 billion in Q2 ’15. Over the same time period, the stock price has increased from $83.59 to $130.28.
While the ownership control has not changed like it does in most leveraged buyouts, using its own cash hoard to repurchase shares has created significant value for the shareholders. Apple management clearly saw their shares as undervalued and believed that their cash was well used by purchasing these inexpensive shares, thereby arbitraging the company’s pricing inefficiency.
This move by Apple is similar to a leverage buyout. In a leveraged buyout, a company makes an acquisition using funding from outside resources or a deal made between the buyer and seller as a promissory note. In Apple’s case, the buyer is Apple and the seller is the market. Apple’s “outside” funding of $140 billion is repurchasing, or acquiring, the fully diluted shares of the company. It is a very interesting expenditure by Apple, which has provided a substantial boost to long-term shareholders.