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Could Apple Thrive Without Steve Jobs?

The maker of the iPod is on a roll. But the options back-dating scandal casts uncertain shadows.

Aside from being extremely wealthy, what do Warren Buffett and Steve Jobs have in common? The answer: Few chief executives are more intimately associated with the companies they run. The future of Berkshire Hathaway after the 76-year-old Buffett departs, either voluntarily or not, has long been the subject of Wall Street and media speculation. But it may be just as appropriate to ask what would happen to Apple -- and its stock -- if Jobs were to leave the scene.

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Jobs' departure from Apple would almost surely be the result of completely different circumstances. Jobs, who turns 52 in February, is one of the highest-profile executives to be ensnared in the options-backdating scandal. In late December, a two-man committee of outside Apple directors, chaired by former Vice-President Al Gore, exonerated Jobs of any misconduct. It added, however, that Jobs knew of thousands of options issued between 1996 and 2003 that had been improperly dated. On January 12, the U.S. Attorney's office in San Francisco disclosed that it had launched a criminal investigation into options backdating at Apple.

What's the options-backdating scandal all about? Companies award stock options to lure and keep talent and to align the incentives of executives with those of shareholders. Companies typically grant options "at the money," meaning that the exercise price of the options is equal to the stock price on the date that the options are granted. Backdating is when the company re-sets the exercise price to an earlier date when the stock’s price was lower. That guarantees that a recipient's options award is "in the money."

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Some 200 publicly traded companies have been implicated in the backdating mess. In a number of instances, CEOs have been forced to resign. No prominent public figures, shareholders or analysts have suggested that Jobs do the same, but his involvement with backdating should be of concern to shareholders. Particularly worrisome are reports that investigators are looking at 7.5 million options that were granted to Jobs at a special meeting in October 2001 that, it turns out, never took place.

Jobs is clearly one of high-tech's leading visionaries. His role in popularizing the iPod and iTunes and offering an alternative to Window-based computers with the Macintosh can't be underestimated. Many expect the iPhone, Apple's initial foray into telecom, to be a blockbuster. Apple's shares soared from a bit more than $6 (adjusted for a split) in early 2003 to as high as $98 recently. The stock (symbol AAPL) closed at $88.50 on January 19, down 0.6% for the day.

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But Wall Street and other analysts don't seem overly concerned about a Jobs exit. They say to focus more on the fundamentals -- new-product launches, competition, valuation and so on. Recent analyst missives about Apple from Standard & Poor's and Citigroup, for example, didn't mention the options scandal at all. Neither did an 18-page report by Lehman Brothers on Apple's December-quarter earnings, which, by the way, were spectacular. Give Argus Research analyst Wendy Abramowitz credit for at least acknowledging that Jobs' resignation would lead to "significant volatility" in the stock. Translation: It would go down -- a lot.

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Apple shares have already given some indication that they would not react well to Jobs' resignation. They fell as much as 5% on an intra-day basis on December 27, when word first broke about Jobs' possible involvement in backdating irregularities. And the stock gained 5% on December 29, after Apple issued its exculpatory report.

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If Jobs resigned or was forced out, who would succeed him? Unlike Buffett, who says he has already chosen a successor (but won’t identify the person), Jobs’ heir is not apparent. The likeliest candidate is chief operating officer Timothy Cook. But it would be months, if not years, before he could win the confidence of investors.

Morningstar analyst Rod Bare calls the Jobs matter a "modest-to-medium type risk." Bare, who rates Apple's shares a sell because he thinks they're only worth $86, says he's more worried about such things as intensifying competition and the risk that some new products could flop. Moreover, he notes that few companies ever prosper for long in the notoriously volatile and fickle consumer-electronics business.

That said, Bare thinks there's a 10% chance that Jobs would be forced to leave because of the backdating scandal. If he did, the stock could tumble 20%, he predicts. But he also thinks that Apple "has enough good things built into its DNA now that it could carry on without Steve. Apple should keep dividing and conquering like it's done with the PC and the iPod. That will be enough to get it through the next five to seven years, with or without Steve."

If Bare is right, those of you who don't own the stock might welcome Jobs' departure. You could acquire the shares, which at 34 times estimated earnings of $2.60 a share for the fiscal year ending next September are hardly cheap, at a more-favorable price. And if you already own the stock? It would be prudent to keep your eyes on the Jobs outlook.

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