February 08, 2013

What is Apple to do with all that Damn Cash in Hand?


Back in 2003 - 2004, when Microsoft was sitting on what was then considered an "astounding" $63 billion in cash, the company, which had long resisted the dividend path to distributing cash back to its shareholders, finally did so - distributing a onetime dividend of $3 per share.

Since then, it has routinely declared quarterly dividends, albeit in a very modest way. Behind the scenes the company had and still pursues an ongoing strategy of stock buybacks, but that never has the same palpable sense of distributing the cash hoard back to its shareholders.

Today, Apple has better than doubled Microsoft's cash hoard - let's never the less call it a "doubly astounding" $137 billion in cash in hand. It is hard to truly fathom that number of dollars, just sitting around more or less doing nothing.

In the old days, Steve Jobs believed the cash hoard was a strategic weapon - recall his now famous comment that he would "use all of Apple's [then} $48 billion in cash to wage thermonuclear war" on Samsung and Google.

But those days are gone and CEO Tim Cook has offered up a three-year plan to deliver about $45 billion back to shareholders through dividends and stock buybacks. The problem is that the $45 billion plan was made before Apple's hoard had risen to $137 billion. Apple makes so much money it simply doesn't know what to do with it. It's an enviable position in one sense, but a distinctly unenviable one from another - especially when unhappy large scale and institutional shareholders are part of the game.

That brings us to yesterday and today. Yesterday, the Wall Street Journal delivered coverage on a topic that would normally involve a very small collection of institutions and people. But Apple being Apple, and with the unfortunate undercurrent of "Apple's best days are behind it" noise that remains in the air - and with the stock price currently sitting well below $500 per share ($477 as we write at 11 a.m. this morning) - the big players want some money back. And by "some" we mean a great deal of it.

The Wall Street Journal's CFO Journal provides the following details, provided here in full as the details provided are important to understanding the story as well as the key player - hedge fund heavyweight David Einhorn - behind the story:

Apple’s massive cash hoard is sparking a shareholder revolt. Hedge fund manager David Einhorn is leading the charge with a lawsuit to block a proposal that would require a shareholder vote before Apple can issue preferred stock. Einhorn, whose firm Greenlight Capital and its affiliates own about $610 million worth of Apple stock, wants Apple to distribute a “perpetual preferred” stock that would return cash to shareholders by paying a bigger yield than Apple’s regular shares.

Einhorn had been trying to get Apple CFO Peter Oppenheimer on board with the idea for months and told Reuters that he felt blindsided when he got Apple’s annual proxy statement. “We saw that the proxy came out and we saw they were planning to get rid of preferred and then we said, ‘Wait a minute, we are not going to be able to bring this up again in a good way if we allow them to do this. So we should contest it now,’” Einhorn said.

Apple’s mountain of cash has jumped 68 percent since the end of fiscal 2011 to about $137 billion. That’s too much as far as Einhorn is concerned. He compares Apple to his grandmother, whose experience surviving the Great Depression made her an extreme saver who wouldn’t leave voicemail messages for fear of using extra cell phone minutes, DealBook notes.

Einhorn thinks Apple’s own near-death experience in 1997 left a similar scar on its corporate psyche.

He’s not alone in worrying about the hoarding. “A lot of people now feel the crisis is largely behind us, and want companies to start investing in growth and creating value,” Craig Orchant, partner at EA Markets, told the Journal. “There’s now a much less tolerant view of enormous cash balances.”

The crux of the matter hinges on the issue of preferred stock. Einhorn fully believes that for large-scale investors, it’s the best route to unlocking real value from Apple's cash stash. He is clearly worried about Apple's "depression era mentality" of hoarding the cash, and he is no doubt right to be doing so.

But is his "perpetual preferred stock" strategy the right strategy for unlocking that value? It's extraordinarily difficult to say, and it requires delving into some of the more arcane language of the technical investment community to really get at it.

Apple itself felt compelled yesterday to issue a public statement on the matter, which is reproduced in full here:

By early last year, Apple’s cash balance had built to a point beyond what we needed to run our business and maintain flexibility to take advantage of strategic opportunities, so we announced a plan to return $45 billion to shareholders over three years. As of next week we will have executed $10 billion of that plan.

We find ourselves in the fortunate position of continuing to generate large amounts of cash, including $23 billion in cash flow from operations in the last quarter alone.

Apple’s management team and Board of Directors have been in active discussions about returning additional cash to shareholders. As part of our review, we will thoroughly evaluate Greenlight Capital’s current proposal to issue some form of preferred stock. We welcome Greenlight’s views and the views of all of our shareholders.

As a part of our efforts to further enhance corporate governance and serve our shareholders’ best interests, Proposal #2 in our proxy includes some recommended changes to our articles of incorporation. These changes were recommended independently of Greenlight’s proposal and would not preclude Apple from adopting their concept. Contrary to Greenlight’s statements, adoption of Proposal #2 would not prevent the issuance of preferred stock.

Currently, Apple’s articles of incorporation provide for the issuance of “blank check” preferred stock by the Board of Directors without shareholder approval. If Proposal #2 is adopted, our shareholders would have the right to approve the issuance of preferred stock. As such, Proposal #2 has the support of many of our shareholders.

We remain committed to having an ongoing dialogue with our shareholders to get perspectives around return of capital and driving shareholder value.

As we noted earlier, if it wasn't Apple this story would not be in the headlines where a much larger collection of readers exist for it than would be the case with most such articles. For us, it strongly suggests Apple is now fully out of its precocious teenage years and entering the adulthood stage where the rules of the financial road need to be considered.

Having said that, we also worry that it is something that would lead Apple to scale back on Apple innovation - which we absolutely believe would be the proverbial kiss of death for the company.

At this point in time there isn't much left to say about the matter. Much depends on how the upcoming annual shareholder meeting goes on the proposals that are now on the table. For those among us who revel in financial geek speak, Henry Blodgett of Business Insider had a very interesting e-mail exchange with Einhorn - it is well worth searching out and reading for that reason. It sheds real light on Einhorn's position, and don't be fooled by Blodgett's constant refrain of it's all beyond his level of understanding. He knows. Now you will as well.

For us it remains an issue of Apple and precocious innovation.




Edited by Braden Becker



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Google    Microsoft    Apple
       

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