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Einhorn vs. the Apple Goliath (Update1)

Stocks in this article: AAPL

Apple shares have vastly underperformed in recent months, falling 26.5% over the past six months for a variety of reasons. Einhorn is trying to reinvigorate Apple's share price with this maneuver. AAPL Chart AAPL data by YCharts

When I first heard this case made in May, I thought it was a creative idea, but just an idea. I agree with Einhorn that Apple's management, led by CEO Tim Cook, CFO Peter Oppenheimer and Treasurer Gary Wipfler, are conservative when it comes to cash, a stance which may stem from the near bankruptcy Apple experienced in the late 1990s. I just don't think Apple will cave to Einhorn's activism here.

Apparently CalPERS disagrees with Einhorn. In an SEC filing, CalPERS (California Public Employees Retirement System) said it would vote with Apple. In a tweet, CalPERS reiterated this. "RE: APPL: CalPERS supports majority voting & approval for preferred stock. Prop 2 strengthens rights & deserves full support. #corpgov. CalPERS owns 2.7 million shares of Apple.

Apple has $145 a share in cash, and Einhorn notes that every $50 billion in preferred stock would unlock $32 a share in cash. He also believes that Apple shares would appreciate further, with a higher earnings multiple, as the "market appreciates a more shareholder friendly capital allocation policy." There's one major caveat with this solution. Most of Apple's cash hoard is overseas. You can't pay the dividend with overseas cash unless there's a repatriation of that cash, which seems highly unlikely.

Einhorn notes that the preferred shares "represent a simple, low-risk way to reward shareholders without compromising the financial and strategic flexibility of the Company, or forcing the company to incur tax on repatriating its offshore cash balances." I'm not sure how he arrives at this given the dividend would have to be paid on the preferred shares. There's always the possibility that there could be an inter-company loan set up to avoid repatriating the cash (thanks @IvanTheK for reminding me of this fact), but that would a complex structure. Apple has been working on increasing transparency, so I'm not sure how that would work.

The issue of falling stock price has been talked about before. Morgan Stanley analyst Katy Huberty recently asked about Apple's growing cash hoard and the possibility of buying back more stock than Apple originally planned. Oppenheimer noted "this is something that we continuously assess - the opportunities to both invest in the business and return cash." He noted that Apple is considering increasing its buyback and dividend programs, and would do "what we think is in the best interest of our shareholders."

Einhorn issuing a press release to try to raise the share price is showmanship at its best. Apple's style when it comes to managing its cash is understated, not flashy. It does not do major acquisitions for the sake of acquisitions, and only last year started giving back some of its cash to shareholders.

David is going up against Goliath on this one. Even with Einhorn's penchant for publicity and friends on Wall Street, it's going to be a tough battle. Ultimately, I think Apple will win and eliminate the preferred stock. Perhaps there is a dividend increase in the future, but it won't be because Einhorn wants it. It'll be because Apple wants to.

Place your bets.

--Written by Chris Ciaccia in New York

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