Think different: Apple's $17B debt offers stark contrast to 1996's junk bonds

17 years ago, Apple was on the brink of disaster, and its junk bonds reflected the unease over its future with Windows dominant

Apple's record-setting $17 billion bond offer this week stood in stark contrast to the company's darkest days, when in 1996 its millions in notes were rated as junk because investors wondered if the company would survive a thrashing by Microsoft.

On Tuesday, Apple filed a prospectus with the U.S. Securities and Exchange Commission (SEC), outlining what numerous media outlets, including the Wall Street Journal, the New York Times and Bloomberg reported: That Apple would issue $17 billion in low-interest bonds to finance part of its stock buy-back and larger-dividend strategies.

Those bonds, part of a record corporate offering, were scooped up as investors rushed to add them to their portfolios.

According to Goldman Sachs and Deutsche Bank, the financial houses that underwrote the sale, Apple's offer generated about $52 billion in investor demand. Moody's Investors Service and Standard & Poor's gave Apple their second-highest ratings, "Aa1" and "AA-plus," respectively, but citing increased competition and uneasiness about future products, neither awarded the company their coveted "AAA" ratings.

How times have changed.

In early 1996, Standard & Poor's downgraded Apple's bonds to below investment grade, meaning they were tagged with the notorious "junk bond" label, and thus out of bounds to some investors, such as trusts. Moody's followed in March 1996 with a downgrade of its own, citing, among a whole host of factors, "a growing destabilization of its operating results, business position, and financial profile resulting from the company's increasing isolation in the Windows-dominated, IBM-compatible personal computer industry."

In particular, Moody's knocked Apple's financial future because of the onslaught of Windows, the graphical user interface (GUI) from bitter rival Microsoft. "Apple's products no longer can support premium pricing to its competitors because advances in Microsoft Corp.'s Windows operating system have substantially eroded Apple's Macintosh operating system's historic ease-of-use advantage," noted the credit firm.

Both Standard and Poor's and Moody's were also reacting to a poor 1995 fourth quarter, for which Apple reported a loss of $69 million even as revenue grew 11% year-over-year to $3.15 billion.

To repeat: How times have changed.

Later in 1996, Apple issued and sold $575 million in junk bonds that were to mature in 2001 and pay 6% interest, just under the then-current U.S. Treasury note five-year rates. Those bonds were "convertibles," in that they were convertible into Apple shares at $29.20. The year before, Apple had floated hundreds of millions in five-year bonds paying 6.5%.

Not this time. According to Tuesday's prospectus, Apple will pay interest of just 1% -- albeit in a vastly different debt market than 17 years ago -- for its five-year notes, less than half that for the shortest-term bonds that mature in 2016, and 3.85% for its 30-year bonds.

But then, Apple was in a very tight corner in 1996, the year before the board of directors ousted CEO Gil Amelio and named co-founder Steve Jobs as interim chief executive.

"They were a mess," said Ezra Gottheil, analyst with Technology Business Research, citing declining sales, product chaos and a near-death experience for the company in the mid-1990s.

By all accounts, Apple was close to dissolution, with rumors flying of its breakup, to be parceled out to bidders, or its wholesale acquisition by any number of buyers, including Sun Microsystems, at the time a major player in workstations and servers that was poised to reap massive rewards from the emerging Internet. In a Jan. 31, 1996 story by the New York Times, for example, an Apple stock slide was attributed to news that acquisition talks between Sun and Apple had stalled.

Those talks, of course, never resulted in Sun -- which was itself acquired by Oracle in 2010 -- buying Apple.

Apple weathered 1996 on the back of a reorganization started by Amelio's predecessor, Michael Spindler, but intensified by Amelio, that ultimately eliminated a third of the company's workforce. In his year-and-a-half in Apple's top office, Amelio also began paring its inflated product line, killed the problem-plagued Copeland -- the internal effort to come up with the Mac's future OS -- and near the end of the year, offered $429 million for NeXT, Jobs' company.

By mid-year 1997, Jobs had talked the board into booting Amelio, and four years later, Apple shipped the first version of Mac OS X, which was based on the NeXTSTEP operating system acquired in the NeXT purchase.

The turnaround in Apple's fortunes was exemplified, if not caused, by the appearance of arch-rival Bill Gates, then the CEO of Microsoft, via satellite at the August 1997 Macworld Expo conference, less than two months after Jobs' coup.

That moment was the culmination of a deal Microsoft and Apple negotiated under which Microsoft purchased $150 million in Apple stock -- promising not to sell it for three years -- signed a five-year patent cross-licensing agreement, and settled lingering issues from 1988 litigation where Apple accused Microsoft of stealing its GUI to create Windows. Another part of the package committed Microsoft to ship a Mac version of its Office suite, which it continues to sell today, as well as a Mac edition of Internet Explorer, which no longer exists.

"We have to let go of this notion that for Apple to win, Microsoft has to lose," said Jobs, who minus his later turtleneck trademark, gave what he called a status update on the health of Apple, and as part of that Macworld presentation, introduced Gates to attendees, who both applauded and booed at the sight of the Microsoft co-founder.

"We have to embrace a notion that for Apple to win, Apple has to do a really good job," said Jobs. "And if others are going to help us, that's great because we need all the help we can get. And if we screw up and we don't do a good job, it's not somebody else's fault. It's our fault."

During the same keynote, Jobs unveiled Apple's newest advertising campaign, dubbed "Think Different."

For the first quarter of 2013, the one most recently reported, Apple recorded total revenue of $43.6 billion, and a profit of $9.5 billion. Meanwhile, the week before, Microsoft announced quarterly revenue of $20.5 billion and profit of $6.1 billion.

On April 26, Microsoft quietly offered $1.95 billion in "AAA"-rated bonds to the U.S. market, and 550 million ($725 million) to the European market. The note issuances received little media coverage.

One more time: How times have changed.

This article, Think different: Apple's $17B debt offers stark contrast to 1996's junk bonds, was originally published at

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is

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