The article Apple, Coronavirus, and Risk-Management by Amiyatosh Purnanandam
Executive Summary
In the article Apple, Coronavirus, and Risk-Management, Amiyatosh Purnanandam gives a critical outlook at coronavirus outbreak and its impacts on highly indebted firms, such as Apple. As the virus continues to threaten human life, Apple is also more vulnerable due to its high dependence on Chinese manufacturers and its broad customer base in China. The disease, therefore, causes significant uncertainties to the firm’s future earnings. However, Purnanandam notes that Apple needs not to worry since it has a $200 billion pile of cash (1). In times of a crisis, the writer indicates that a healthy cash balance cautions companies against unpredictable events. Even the risks that cannot be quantified or identified ahead of time can be addressed when a company has a significant cash balance.
In any organization, the author highlights the role of chief financial officers (CFOs) in not only figuring out their firms’ risk exposures but also devising strategies to manage them. CFOs spend most of their time analyzing and quantifying common business risks that emanate from fluctuations in exchange rates, interest rates, and commodity prices (Purnanandam 1). They are mandated to identify common sources of threats, potential impacts, and offer practical mitigation measures. However, they are human beings without magical powers to detect risks that cannot be quantified in the traditional sense. The author gives an example of coronavirus, which has terrorized the world in less than three months, yet no business had anticipated it.
As Purnanandam further states, firms need to hedge risks when faced by any form of financial distress. Hedging exposure to fluctuating exchange rates and commodity prices minimizes cases of financial struggle in case of unpredictable adverse events (Purnanandam 1). When market turbulences occur, companies will still focus on their core businesses, which allows continuity and profitability even in difficult times. However, the writer argues that hedging is only possible for market-based sources of risks. In case of unforeseen risks, most firms are left with limited options, as seen in the case of the coronavirus outbreak.
The main question that the author raises is how managers can manage risks that are not even identifiable. Typically, it is easy to hedge commodity prices and exchange rates. However, there are no market-based derivatives that companies can use to hedge disease-related threats. Nonetheless, a healthy cash balance will always be an ultimate hedge against most of the unpredicted and uncertain events (Purnanandam 2). Establishing a conservative financial policy ensures that firms always have enough cash to fight them.
From what is happening across the globe, it is clear that investors never anticipate the catastrophic consequences of virus attacks. There have been previous outbreaks, such as swine flu and Ebola, though most of them are short-lived. Most of the previous outbreaks did not leave any substantial impacts; hence, no one ever thought about how the situation would be like if an outbreak prolongs or takes a turn for the worse (Purnanandam 2). In such a case, companies low on cash will face numerous financial challenges and will probably struggle to survive.
The writer concludes that Apple’s enormous cash balance is its main strength in the midst of the current crisis. In the past, some activists have urged the company to pay this money out via share buyback. However, the company has always held this money, perhaps for a time like now. As Purnanandam states, Apple can use this cash to shift its supply chain to other countries (2). Alternatively, it can be used to sustain the company in case of a drop in global sales. Even when production costs go up, the firm will still remain competitive in the market.