NEW YORK (TheStreet) -- In a recent 13F filing, hedge fund manager Carl Icahn revealed that he had a 3.875 million share position in Apple
(AAPL - Get Report), amounting to $1.85 billion.
However, that was as of Sept. 30th, (the most recent data for 13F filings). In a more recent letter (more on that below), Icahn admitted to having 4.73 million shares, an increase of 22% to $2.5 billion. He also said he "intends to buy more."
Icahn regularly tweets how his lunch dates go with Apple CEO Tim Cook, which for now, is supposedly going well.
I can't speak for Icahn, but I can only image there will come a time when these tweets aren't quite as friendly, as Icahn tries to force Cook's hand in his request of a larger buyback program.
Or perhaps he won't, as it will directly hinder the performance of his own position.
But in the end, that's all he's chasing the stock for, financial engineering. In short, Icahn believes that Apple's share price would increase -- to the tune of 240% -- if the company would implement a $150 billion share buyback program. He had this to say in a letter to Cook:
"Apple generates more than enough cash flow to service this amount of debt and has $147 billion of cash in the bank. As we proposed at our dinner, if the company decided to borrow the full $150 billion at a 3% interest rate to commence a tender at $525 per share, the result would be an immediate 33% boost to earnings per share, translating into a 33% increase in the value of the shares, which significantly assumes no multiple expansion. Longer term (in three years) if you execute this buyback as proposed, we expect the share price to appreciate to $1,250, assuming the market rewards EBIT growth of 7.5% per year with a more normal market multiple of 11x EBIT."
This essentially sums up the letter, but can be read in its entirety here
The argument for the tender offer essentially falls into two categories:
- Apple is a technology company and should not be putting all or most of its cash to work by buying back stock. It also shouldn't be bullied by large investors who are only looking to increase their returns.
- Cook should listen to Icahn's proposal because the amount of cash Apple does have, and will make in the near-term, is so tremendous that it should be used to unlock value for shareholders. By doing so, it will leave more than enough cash for R&D and most M&A candidates, especially the ones Apple typically targets.
Both arguments have their merits, which is why it leaves Apple's board, and more specifically, Cook, in a catch-22.
the buyback is
the best use of Apple's cash. With nearly $150 billion on the balance sheet and much more on the way, Apple can easily afford to buyback its own shares.
Of course, many will argue that a lot of Apple's cash is located offshore, thus requiring the company to pay repatriation tax on it. However, with Apple's high credit quality -- coupled with the current low interest rate environment -- borrowing the amount needed (or some of it) for Icahn's proposed buyback would be relatively inexpensive.
But does Cook really
want to be told what to do by Icahn? ...Bullied into what some billionaire investor thinks is best for his company, or more accurately, himself? I don't think the issue is necessarily whether to do the buyback, but rather, the principle of being told to do it.
Those opposed to the offer will also argue that Apple is a technology company, where the cash should be used for growth, not repurchasing shares. While I would tend to agree, it's also true that Apple appears to have too
much money at the moment.
It would be doing an injustice to shareholders, and itself, to leave that much cash on the balance sheet. I think everyone would agree to that. So where's the middle ground? What should the board do?
As much as I don't like management being told what to do by loud-mouthed hedge fund managers, it might create the best value for shareholders.
Of course, Icahn will lay out the best case scenario in his argument, including the "assumption" that the market allows for multiple expansion, which it very well may not. Bottom line: Apple has too much cash -- which will soon hit $200 billion; then $250 billion; then what? The stock will have likely appreciated higher, say $600, and the market's going to have one ticked-off Carl Icahn.
I agree that an additional buyback wouldn't hurt the company seeing that both Icahn and Apple's management currently view shares as undervalued. However, critics will argue that a share buyback shouldn't be the main catalyst at a growth company.
It's not! Apple has the new iPhone, iPad Air and iPad Mini, and all three should sell well throughout the holidays. I'd rather see a buyback than a huge dividend or something stupid that no one has thought of yet. However, I don't think the buyback should be in the $150 billion ballpark -- maybe $80- to $100 billion. A $100 billion buyback would be big, but not colossally gigantic, and will also benefit shareholders. That will show a few things: Apple is willing to listen to shareholders -- fund manager or not -- while also not bowing down to their commands. It'll also leave a fair amount of cash on hand for other purposes (R&D, M&A, etc.).
My personal opinion is that management should not cave in to the likes of Carl Icahn or David Einhorn (a previous manager who had issues
with the cash hoard).
At the same time, management shouldn't dismiss any idea from them due to arrogance, since a good idea shouldn't be tarnished simply because it was not their own.
So Cook is caught in a catch-22. Surely, he doesn't want to tell off Icahn and reject the buyback offer, but at the same time, Cook can't look weak and cave in to his demands.
I'm telling you, Tim: It might be best for all parties to meet somewhere in the middle.
At the time of publication, the author was long AAPL.
-- Written by Bret Kenwell in Petoskey, Mich.