Is Apple's Split A Defense Against Activists?

NEW YORK (TheStreet) - Apple's (AAPL) seven-for-one stock split is already having the desired effect. Institutional ownership of Apple shares has fallen in the past week, indicating that retail investors have used the split to buy Apple stock and become a greater percentage of the iPhone maker's shareholder base.

David Einhorn Was Right About Apple

Apple CEO Tim Cook said in April the 7:1 split was intended to make "Apple stock more accessible to a larger number of investors." Most took those comments to mean Apple's share price, around $600 at the time, was tempering retail investor interest in the company. A split, however, could make Apple shares more palatable for individual investors.

That's exactly what is happening just five trading days into Apple's split.

The percentage of institutional holders of Apple shares has fallen since the company's stock split. Institutional investors held 63.84% of Apple's outstanding shares as of June 8, according to Bloomberg data. After Monday's stock split that ownership has fallen to 63.38% as of June 13, the data shows.

While a half percentage point drop in the percentage of institutional Apple shareholders may appear to be grasping at straws, it is a significant change for a company with a market capitalization in excess of $550 billion.

More to the point, the percentage of Apple shares held by institutional investors is on a consistent downtrend and appears poised to fall to new multi-year lows. Apple's institutional ownership bottomed at about 63.30% in early January. Now, continued retail interest in Apple shares will take institutional holdings to multi-year lows.

The longer-term trend is even more significant.

Institutional holders as a percentage of overall Apple shareholders have fallen over 10% over the past three years. In June 2011, institutional holders accounted for nearly three-quarters of Apple shareholders. How far could Apple's institutional ownership fall?

That may be an important question for Apple, and could it could even shed new light on the company's motives for the split.

Stock splits have long been looked upon by investors like Warren Buffett as an unnecessary piece of financial engineering. Splits do nothing to impact a company's fundamental performance. When Berkshire Hathaway (BRK.B) split its stock as part of a takeover of BNSF Railways, Buffett said the move was like "preparing for a colonoscopy."

Splits have also been used to fend off hostile takeover bids and corporate raiders. Splitting shares can broaden a company's investor base, minimizing the prospect that a team of institutional investors vote together on corporate issues.

Apple is all to familiar with large, unsatisfied shareholders pressing for change.

In 2012, David Einhorn of hedge fund Greenlight Capital Management first advocated Apple dramatically alter its capital structure by issuing billions of dollars' worth of perpetual preferred securities. Apple didn't bite on Einhorn's plan, which was called 'iPrefs.'

Instead, the company launched a $45 billion stock buyback and dividend plan in May 2012, a move Einhorn applauded. Apple more than doubled that buyback and dividend plan in 2013, but it wasn't enough.

Billionaire activist investor Carl Icahn waged a new campaign to have Apple further increase its buyback and dividend activity. After multiple meetings with CEO Tim Cook, the company relented with its own plan to increase capital returns. Icahn holds nearly $5 billion worth of Apple shares.

Perhaps, Apple now wants to change the conversation with its shareholders.

Institutional holders like Einhorn and Icahn look at Apple's earnings and balance sheet and marvel at the cash that can be returned to shareholders.

Retail investors in Apple, by contrast, are more likely to simply be enamored with the company's products. It is also harder for retail investors to vote their shares in unison, when compared against large institutional investors.

Silver Lake's takeover of Dell, for instance, showed the power that a group of organized institutional investors can have on a company. Had Dell not changed the deal's voting standard at the last minute, a set of institutional holders led by Icahn would likely have blocked the takeover.

I couldn't find anyone to bite on my theory that Apple's stock split may, in part, be a defensive maneuver against the institutional investors that have carried much of the conversation about the iPhone maker in recent years. Some speculate the move could eventually lead to Apple's inclusion in the Dow Jones Industrial Average.

"It won't reduce the influence of institutional shareholders even though the stock is more accessible to individual shareholders in the $90 dollar range than in the $600 range. The big institutions have no trouble influencing companies whose shares are at $12," Erik Gordon, a professor at the Ross School of Business at the University of Michigan, said in an e-mail. "The split has a cosmetic benefit for Apple management," he concluded.

Brian J.M. Quinn, an associate professor at Boston College's School of Law and an M&A expert, also doesn't see much of an impact. If anything, the extra liquidity in Apple's stock as a result of the split could help an activist or large institution accumulate shares, he noted.

"Fundamentally it doesn't make a difference... We are indifferent," said Jeffrey Fidacaro, a technology analyst at Moness, Crespi, Hardt & Co., of Apple's stock split in a telephone interview.

Perhaps the split has nothing to do with Apple's battles with shareholders. However, don't be surprised if the company's investor base becomes increasingly oriented towards retail and conversation quiets on matters like stock buybacks.

David Einhorn and Carl Icahn couldn't immediately be reached for comment.

Apple Split Renews Focus on Products

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-- Written by Antoine Gara in New York

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