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Forbidden Fruit?

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.

ipad_piggyLet’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.

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10 thoughts on “Forbidden Fruit?

  1. Einhorn comes off as a spoiled rich kid to me. I think arguing with Apple’s success or its EPS is ridiculous. It is the best investment for that money.

    • I think I agree all around. This is bizarre stuff. But if it winds up confirming that a pile of cash is not necessarily a target we have a precedent that might change things – that’s what I care about.

  2. Dell shows us that this is a serious issue and worth a lot more time and discussion. Investors have one set of expectations and tech companies have another. I agree that tech companies like Apple understand their business much better and should be able to operate the way they need to but it doesn’t work out that way. A large cushion is probably essential to their long term focus and they have to be able to maintain that if that is in their business model.
    This is by far the best article on Apple I have seen in a long time. Kudos to you for writing it.

    • Thank you very much! I have been thinking about this in broader historical terms, as I tend to. The great industrialists like Rockefeller and Carnegie had many opposing forces to deal with, especially unions and government. But there was an intense rivalry with investors – the group that ruined railroads with over speculation and plummeted the nation into the Long Depression in the 1880s.
      The tension is that a new product creates new markets, which is to say new opportunities for speculation and sales. Who controls that market – the manufacturer or the market itself? That has been an age old question. Today, we have to inject the consumer into that to form a more complex triangular tug of war, so history doesn’t teach us everything.
      Note, for example, what no one has said anything about so far – Apple’s Foxcon contract in China that proved embarrassing for low labor standards. We see the pull of worker rights expressed as bad PR (similar to the old days) but the tension came in the form of consumer action. Interesting …
      Who runs a company like Apple – shareholders, Apple, or consumers? Ultimately it’s a bigger view of what a “market” is – but Apple does know how to manage their long-term focus the best of all the groups fighting for a piece of the action, IMHO.

  3. yes what about foxconn – you cant talk about apple without talking about the devastation it leaves behind – perhaps if they have too much money they could buy the freedom of their slave workers – maybe even pay them?

    • I, for one, hope that this comes up at the shareholder’s annual meeting – and expect that it will. Apple is moving away from Foxcon, but that only leaves unemployment in their wake.
      Yes, whose money is all this? Shareholders? Workers? Or is it the sole property of this might beast called “Apple” that as we all know is not really a person no matter how law defines them?

  4. UPDATE – Einhorn has won his Federal suit against Apple, meaning that there will be no vote on a bundled resolution that limits the Apple Board’s ability to release new shares of stock. It’s largely meaningless, however, in the bigger fight – and gets Einhorn no closer to his “iPref” shares with a perpetual 4% interest rate (which is still a really dumb idea for Apple).

  5. Pingback: Inequality Becomes Intolerable | Barataria - The work of Erik Hare

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