How can a company have too much money? If you believe hedge fund manager David Einhorn, Apple certainly does. Many in the tech industry “view their self-importance by the size of bank accounts,” according to this Apple investor, and he’s aggressively promoting a unique way of distributing the $137B Apple cash reserve to shareholders ahead of the company’s annual meeting on 27 February.
While Apple’s attitude is on trial – in the courts, the stock market, and the media – it’s hardly an unusual position for a technology driven manufacturing company. What is unusual is how Einhorn is approaching that pile of cash and how it is distributed. This may be more evidence that the days of corporate raiders as we know them are over and a potential new golden era for tech companies is ahead.
Right now we still have a fight to finish before anyone can claim victory.
Let’s start with the basics. The $137B in question has to be viewed in comparison to their $157B in annual revenue (2012) and earnings of $19.7B$ (12.5%). Essentially, they have a year’s expenses in the bank. This is a bit high but not unusual for a high-tech manufacturing company which has a large amount of overhead in the form of research and manufacturing to keep going regardless of any short-term difficulties that they may encounter. A large cushion is the price of a long-term focus and gives them the ability to buy companies and their technology without having to go to Wall Street for financing. It’s a matter of resiliency in difficult times.
Dell has decided to become a private company largely to protect its cash position from Wall Street and allow it to operate completely independent of capital markets.
The rub, of course, is that this is a lot of money and something of an attractive nuisance to Wall Street. Money managers tend to see that as stagnant capital – a big waste of resources that could be returned to shareholders as increased dividends. In the days of the 1980s “corporate raiders” many similar companies found themselves the targets and were forced to burn through their cash, either in dividends or purchases. Companies that were forever changed in this era include 3M and GM, among many others.
Where this battle becomes strange is in Einhorn’s insistence that a proposed rule be voted on at the annual meeting to allow distribution of this money not through dividends but through a “preferred” or non-voting stock with a fixed annual dividend – something like a bond. He took the unusual step of a conference call outlining his plan for “iPref” shares to be issued in order to gain support.
On the ballot for Apple shareholders is a plan to increase dividends but also to require that any new issuance of preferred stock be voted on by all Apple shareholders, not just the Board. Einhorn has also sued in Federal Court to block this proposal, claiming that the dividend and the issuance of shares are separate issues and should be voted on separately. A ruling is expected ahead of the annual meeting.
It’s worth noting that Einhorn is a serious poker player who has made it to Day 2 of the World Series of Poker before. He’s used to high stakes bluffing and finesse.
The iPref proposal and media blitz is not the only unusual aspect of this action, however. It’s worth noting that while Einhorn owns 1.3M shares worth about $600M, but that is only 0.14% of Apple’s 489B$ market cap. In addition, the California State Pension Fund (CalPERS) has publicly come out against this plan and in support of Apple’s bundled proposition for the annual meeting – and they own about twice as much stock (0.29%). For owners of a tiny percentage of the stock out in the market they both sure make a lot of noise.
Apple, for its part, has offered a total of $10B in dividends in the last 3 years and plans to increase that by another $35B. They acknowledge that their stash of cash is large and are willing to spread it around more. But they maintain that the best investment they can make is in Apple itself, which is to say that the cash is best left in their hands to cover overhead and new opportunities that arise.
As a large and visible company, we had to expect that Apple’s “problem” of too much cash would play out in public. What is interesting is how bizarre Einhorn’s gambit has turned even as he has gained attention far larger than his tiny share in the company. It appears likely that even if he succeeds in messing up the annual meeting Einhorn will never have the iPref he seeks, however.
This could be good news as a high-tech company preserves its rights to operate with a “quiet life”, independent of Wall Street and capable of riding out downturns with a long-term focus. If so, this could be a major turning point as we enter a new economy where growth is driven almost entirely by technology.