I realize this might be hard to imagine, but there was a time not that long ago when Apple was in dire financial straits. Today, Apple is literally the largest company in the world with a market cap of $2 trillion. But back in 1997, soon after Steve Jobs returned from a forced 12-year hiatus, Apple was just 90 days away from going completely bankrupt. As a result of a string of problems with their machines, a few staggeringly dumb business decisions, and products that were perceived as clunky and unpopular, Apple was in a very bad position. Can you imagine a world without the iPod, iPhone, and iPad? That was just three months away from happening!
The reality is that Apple only exists today thanks to a last-minute lifeline from Bill Gates and Microsoft. Their lifeline mainly consisted of a $150 million cash infusion. In 1996, Apple was at an all-time low. Apple's shareholders and customers had lost all faith in the previously revolutionary company, and the competition was closing in FAST. Apple may be a press darling today with journalists fawning over their sleek designs and innovative ideas, but 1996 was a very different story. Worldwide press loved to pile on stories of Apple's ineptitude week after week.
Prior to 1996, Apple was doing pretty well. They shipped 1.3 million Macs and had $3.1 billion in revenue for the period ending December 1995. Unit sales of Macs had increased 26.9% for the first ten months of 1996. Macs were the de facto computer for U.S. schools, ad agencies, and creative professionals such as web and graphic designers. However, events in 1995 put Apple on the path to ruin. In August 1995, the PowerBook 5300 came out. It was the first PowerPC-based PowerBook and was hotly anticipated. Unfortunately, many of the first units shipped were dead on arrival, causing Apple to lose huge market share in laptops.
The Turning Point: Microsoft’s Investment
In 1995, Apple began to license the Mac OS to third-party vendors in an attempt to gain market share. The Mac clones were some of the fastest personal computers on the market in 1996, affecting Apple's bottom line. Although the clones were created to help Apple, in reality, they were killing the company. As a result, Michael Spindler was ousted as CEO and replaced by Gil Amelio in 1996. Under new CEO Amelio, Apple released the Newton family of products, including the eMate 300 laptop, which would be reborn years later as the iPad.
However, Amelio's time was marked by tough decisions as he cut costs and reduced the workforce by thousands. His saving grace in Apple history was that Apple acquired a little-known company called NeXT for $402 million. NeXT's founder and CEO was none other than Steve Jobs, who returned to Apple as a consultant in 1997.
Reviving Apple: The Role of Steve Jobs
Steve Jobs introduced Mac OS 8 in July 1997, which was enormously successful with 1.2 million copies selling in the first two weeks. Jobs would go on to shepherd Apple's reinvention, introducing the iMac, the iPod, the iPhone, and the iPad, which revolutionized the tech industry. At the MacWorld conference in Boston in 1997, Jobs announced a five-year partnership with Microsoft that would include a $150 million cash investment by purchasing Apple stock.
This deal was hard for both Apple and Windows aficionados to swallow. It was like sleeping with the enemy, but it ultimately was mutually beneficial to both companies. Steve Jobs put it best when he said, "We have to let go of this notion that for Apple to win, Microsoft has to lose." Apple got a desperately-needed lifeline out of the deal, and Microsoft kept a failing competitor in business, which helped them because it weakened arguments that the company was a monopoly.
The Aftermath: Microsoft’s Investment Returns
For their $150 million investment, Microsoft received 150,000 shares of Apple preferred stock, convertible to common shares at a price of $8.25 per share. Microsoft began to sell off its stake in 2002, netting $545 million off its investment. That's a 260% return in six years! But what if Microsoft had held onto its Apple stake? Since the agreement, Apple stock has split three times, and today those shares would be worth an astounding $116.6 billion.
How badly does Bill Gates regret not having a little more faith in Apple? The lesson here is clear: if you believe in a company enough to give them $150 million as death knocks at their door, why not keep riding when they’re back to kicking butt? Then again, hindsight is always 20/20.
