Apple's Big Buyout Draws Wall Street Shrugs

NEW YORK (TheStreet) -- Apple (AAPL) announced late Thursday, in an unorthodox interview CEO Tim Cook gave with the Wall Street Journal, that the company had bought back $14 billion worth of its stock in the past two weeks.

People were genuinely surprised. "Apple makes a $14 billion acquisition -- of itself" read one headline.

Most expected the stock to jump Friday morning. As of right now, it's up 1.3%. To me, that's not really a game changer.

To be sure, there are a lot of dynamics going on right now. I'm sure Tim Cook and other Apple employees are frustrated with the "low" stock price. That was stated as one of the justifications for the buyback.

However, a bigger factor, in my view, is that Tim Cook knows he'll be facing Carl Icahn at an Apple shareholder meeting later in the month. He wanted to able to say at that meeting he's already been aggressively buying back stock, so why would shareholders want to vote for Icahn's proposal for the company to buy more?

In fact, it actually serves Cook's needs better that the Apple stock has had such a meh reaction to the news of the buyback. He can get up and say, "Why should we be buying back $50 billion if spending $14 billion did nothing for us? Why not spend that money on R&D or acquisitions?"

The shrugging of shoulders by Wall Street to the $14 billion buyback news just goes to show that $14 billion is just not that significant in the context of a $465 billion company.

The only way I could see a buyback moving the needle in terms of a material uptick in the stock would be if the company came out and said it is using at least $50 billion in one shot to buy back a bunch of shares. And I'm not talking about $50 billion over five years, when Apple is generating something like $15 billion in new cash each quarter. I'm talking all in one shot.

But the truth is the big thing that will move Apple's stock price up is mega-hit new products. To get to over $1,000/share, I think that Apple needs iWatch, TV, an iPhablet, a few buybacks and probably one more surprise new hit product. The company will never be able to financially engineer its way to $1,000/share.

I think Cook executed this buyback in secret over the last two weeks so he would have something big to discuss at the shareholders' meeting. But after seeing Yahoo! (YHOO) execute its buyback over the last year, it's hard not the think that Apple shareholders would have been better served by Cook announcing he would be buying back $14 billion in stock over the next four months rather than that he had already done so in secret.

When I stated that on Twitter last night, I got all kinds of catcalls from people saying the purpose of a buyback is to buy the stock at the lowest price. By that measure, Cook's secret approach was best, as presumably the stock price would jump in anticipation of big buybacks coming in the future.

However, I look at it from the perspective of what chain of events is going to help Apple's stock price be the highest a year from now. The nice thing about the way Yahoo! did it was that investors always believed there was a bid under the current stock price. Yes, of course, Alibaba's growing valuation helped a lot, too, but there was a psychological effect of knowing that Yahoo! was in the market buying shares that supported the price.

The best use of cash, from the perspective of getting the stock price up, is probably more aggressive acquisitions -- something that Apple has been reluctant to do. Would Apple get a higher stock price response from spending $30 billion on Twitter (TWTR) or Netflix (NFLX) or WhatsApp or from a $30 billion buyback? I think the former.

Many Apple fans will say that it's so wasteful to spend that kind of money on an acquisition. Why not build something equivalent for, say, 5% of the cost? If you can, great.

But we are talking about the best use of cash to get the stock price higher. Right now, sitting on the balance sheet, Wall Street is completely discounting the cash altogether. They also seem to be shrugging their shoulders about using that cash to buy Apple's own stock. That leaves acquisitions.

There are clearly holes in Apple's product set today. If it can fill some of those weaknesses through acquisitions -- even big ones -- Apple should.

At the time of publication the author was long YHOO.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

  Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007.

  Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.

  He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson.

  You can contact Eric by emailing him at Dr.eric.jackson@me.com.

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