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Old Feb 22, 2013, 08:17 PM   #51
komodrone
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Originally Posted by flux73 View Post
I'll take a stab...
- Einhorn wanted Apple to issue preferred stock.
- Apple tried to bundle a rule into some proposals that are coming up for shareholder voting that would hamper the issuing of preferred stock. eg Preferred stock will unlikely ever be issued.
- Einhorn got mad that they're taking away the *OPTION* to ever issue preferred stock so he sued to block the proposal.

From Einhorn's perspective, taking away this option lowers the value of the stock. It would be like having a stock where the company says that they not only don't issue dividends, it's a written rule that they will never be issued. Some people/hedge funds will be less likely to invest in it. eg Stock value gets lowered.

A preferred stock is a hybrid investment instrument. It's issued and purchased like an equity, but it pays out a higher *guaranteed* dividend, sort of like a bond. It's less volatile than the common stock and so while your chances of making a lot more are less, so is your risk of losing a lot. The plus side is that you would get something like say 4% dividends, guaranteed. So let's say they issue preferred stock at $50. You would then get $2 per share/year ($0.50 per quarter). It takes higher priority than common stock dividends. Thus, if Apple were ever running short on cash (haha), they would have to pay preferred stock dividends first before figuring how much to pay on common stock dividends. The only instrument that takes higher priority than a preferred stock is a bond, which is irrelevant here.

Common stock dividends are not guaranteed. They are there at the pleasure of the board. So if the board suddenly decides they don't want to give out dividends or wants to lower it, they simply do it. Preferred stock's dividends are guaranteed. They are paid whether the board wants to or not. It functions more like a bond. Thus, it's a "hybrid" instrument.

The big idea behind Einhorn's scheme is that it doesn't affect Apple's cash hoard or flow while paying out a dividend they can easily afford, and simultaneously, it attracts investors to the stock. Preferred stock can be converted to common stock though I'm not familiar with the rules on this. I think the companies make the rules.
thankee, this 5 year old is no longer confused.
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Old Feb 22, 2013, 08:48 PM   #52
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Originally Posted by flux73 View Post

Issuing preferred stock raises capital, so it doesn't. Let's say they issue one share of preferred stock at $50. Then they only pay you $0.50 out of that $50 every 3 months. The net cash is +$50 right off the bat.

No, preferred stock does NOT dilute shareholder value unless it's converted. That's the whole purpose of issuing preferred stock - to not dilute the common stock - while raising working capital.


I think Einhorn's thinking is that if Apple really is saving up the cash to use for something big like Apple TV content deals, then why not issue preferred stock. It wouldn't dilute the common stock, and instantly gives them the working capital they need for whatever they plan on doing without having to wait to accumulate more.

Again, he's suing because Apple is taking away the option, not because they haven't done it. He's merely presenting this as a way they could accomplish multiple goals IF THEY WANTED TO. To take away the option is what's pointless and that's why he's suing.

Einhorn's proposed preferred does not raise any capital. None. It's simply a distribution to common shareholders. Further, there's been no discussion of convertibility.
He claimed that taking away the option was pointless, but the bundling of proposals was the basis of the suit and that on which he prevailed. It was a "silly sideshow" because aapl had stated that it wouldn't consider issuing another class of stock without shareholder approval anyway.
Einhorn has an empty victory and has prevented the other bundled proposals which also favored shareholders, and which also were backed by CALPERS and ISS, from passing.
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Old Feb 22, 2013, 09:11 PM   #53
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Anyone worried about the stock price should be worried about stock manipulation (and media ad-baiting) affecting the perception of the company's very real success. They shouldn't be worried about counter-manipulating the stock. Get the facts out there--be a voice of reason. That shouldn't be as rare as it is.
It is astonishing how much apple bashing occurs from investor news sites. I'm guessing you're right that it's "Click Bait" to gain ad revenue for their sites.

One headline i saw today was something like "Google's pixel has more pixels than Apple's Macbook" Another was "Apple is loosing its cool factor to Microsoft."
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Old Feb 22, 2013, 09:59 PM   #54
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Originally Posted by mccldwll View Post
Einhorn's proposed preferred does not raise any capital. None. It's simply a distribution to common shareholders. Further, there's been no discussion of convertibility.
He claimed that taking away the option was pointless, but the bundling of proposals was the basis of the suit and that on which he prevailed. It was a "silly sideshow" because aapl had stated that it wouldn't consider issuing another class of stock without shareholder approval anyway.
Einhorn has an empty victory and has prevented the other bundled proposals which also favored shareholders, and which also were backed by CALPERS and ISS, from passing.
I re-read Einhorn's proposal and you're right, it looks like he's proposing distribution of preferred stock to current stockholders. This is different from what I understand of how preferred stock is usually issued and so I misinterpreted that part of his proposal.

I don't really know what to make of Einhorn's proposal itself in terms of what it would to do the stock. So far I don't see much of a downside, but I'm not convinced it would cause the share price to skyrocket either. Shareholders do get more money though, so I suppose most current shareholders would support Einhorn. But I think a lot of people are misunderstanding the lawsuit and thinking that Einhorn is suing them to strong-arm them into issuing preferred stock. In my view, Einhorn used the lawsuit as a way to publicize his plan and get shareholders to get behind it.

As for the other bundled proposals, I don't think he stopped them from passing AFAIK. His lawsuit only aimed to unbundle the proposal so that they could be voted on separately. Part of his objection was that he was in support of the other two proposals but could not vote for them without also voting for the proposal he was against.
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Old Feb 22, 2013, 11:15 PM   #55
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Originally Posted by mccldwll View Post
Einhorn's proposed preferred does not raise any capital. None. It's simply a distribution to common shareholders. Further, there's been no discussion of convertibility.
He claimed that taking away the option was pointless, but the bundling of proposals was the basis of the suit and that on which he prevailed. It was a "silly sideshow" because aapl had stated that it wouldn't consider issuing another class of stock without shareholder approval anyway.
Einhorn has an empty victory and has prevented the other bundled proposals which also favored shareholders, and which also were backed by CALPERS and ISS, from passing.
What prevents Apple from spitting those proposals into three separate measures for stockholder consideration? Seems to me that the board might just have been hoping to bundle two good corporate governance measures with an unpopular one on purpose. Seems to me Einhorn hasn't prevented anything but the bundling trick.

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Originally Posted by flux73 View Post
I re-read Einhorn's proposal and you're right, it looks like he's proposing distribution of preferred stock to current stockholders. This is different from what I understand of how preferred stock is usually issued and so I misinterpreted that part of his proposal.

I don't really know what to make of Einhorn's proposal itself in terms of what it would to do the stock. So far I don't see much of a downside, but I'm not convinced it would cause the share price to skyrocket either. Shareholders do get more money though, so I suppose most current shareholders would support Einhorn. But I think a lot of people are misunderstanding the lawsuit and thinking that Einhorn is suing them to strong-arm them into issuing preferred stock. In my view, Einhorn used the lawsuit as a way to publicize his plan and get shareholders to get behind it.

As for the other bundled proposals, I don't think he stopped them from passing AFAIK. His lawsuit only aimed to unbundle the proposal so that they could be voted on separately. Part of his objection was that he was in support of the other two proposals but could not vote for them without also voting for the proposal he was against.
Quite right, but we're supposed to hear "hedge fund manager" and assume anything he says is antithetical to shareholder interests. Because, you know.
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Old Feb 22, 2013, 11:37 PM   #56
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Asking a judge to force Apple to allow individual votes instead of bundling them together to reduce likelihood of having them pass is wrong? If anything this is a win for shareholder rights. You should be happy since large companies routinely steamroll small shareholders' interests.
yeah, but most large companies are run by idiots, who are more concerned with EPS and executive comp than growing the company; usually because they're so large and fragmented that they're hard to focus manage. Apple isn't run by idiots, and they're certainly not fragmented. I'm tired of hearing these idiot analyst/fund managers talking about how Apple should be issuing a larger dividend, and how absurd their cash hoard is. If your shareholder, and you don't like what your company is doing, then sell the stock. It's pretty simple. These calculator cronies need to stop trying telling innovators how to "manage their cash," and let them innovate.
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Old Feb 23, 2013, 12:19 AM   #57
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... and you don't like what your company is doing, then sell the stock. It's pretty simple. These calculator cronies need to stop trying telling innovators how to "manage their cash," and let them innovate.
Aside the from the bundling ruling, isn't that what the Proposal 2.2 (Elimination of “Blank Check” Preferred Stock) does? The Board is putting power into the shareholders' hands for the final say on any issuance of pref shares. That is, the BoD is saying they don't want final say... that it would be mostly be decided by the 68% institutional investors (calculator cronies).

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Old Feb 23, 2013, 05:49 AM   #58
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Originally Posted by komodrone View Post
can someone explain to me like a 9 year old on what the hell is going on?

how about explain it to me like a 5 year old?
Well, you know how mummy and daddy sometimes get grumpy and don't talk to each other... ;-)
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Old Feb 23, 2013, 05:56 AM   #59
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yeah, but most large companies are run by idiots, who are more concerned with EPS and executive comp than growing the company; usually because they're so large and fragmented that they're hard to focus manage. Apple isn't run by idiots, and they're certainly not fragmented. I'm tired of hearing these idiot analyst/fund managers talking about how Apple should be issuing a larger dividend, and how absurd their cash hoard is. If your shareholder, and you don't like what your company is doing, then sell the stock. It's pretty simple. These calculator cronies need to stop trying telling innovators how to "manage their cash," and let them innovate.
It doesn't work that way nor should it. Look, we all see the value in Apple stock and as a company. But as a publicly traded company, Apple is responsible for generating as much value for our stocks as they can. Sitting on all of that cash is not generating any additional value. And without all these analyst and fund managers there is no way in hell Apple would have achieved the value it currently has. You don't cut off your nose to spite your face. What Einhorn is doing is smart. Because now he is indirectly putting Apple in a place where they have to do something or at some point the shareholders will begin to revolt.

----------

And everyone seems focused on proposal #2 and that is not what the judge ruled on. Apple tried to bundle three different issues into one vote. This is the same crap Congress pulls with their pork filled bills. Einhorn simply sued to make sure all three issues were voted on separately rather instead of one bundled vote.

Just because 2 of three sound great shouldn't force shareholders to vote yes that includes a yes vote for something they may not want. The only way this lawsuit is silly is if the shareholders would have voted yes on all three issues anyway but that doesn't give the Apple BOD the right to take away the shareholder's voices or votes. Every one deserves a vote on each issue just not as a combined/bundled vote. It's only fair and there is a reason the rules are in place.
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Old Feb 23, 2013, 09:01 AM   #60
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Keep in mind that while Einhorn would like them to issue preferred stock, it's just a proposal. What he's actually suing about is that Apple is trying to take away that option, not because Apple won't issue preferred stock.
Not exactly. The current BOD process for preferred stock is to *not* issue it without getting approval from the shareholders. The main point of Issue 2 was to make that official, so that preferred stock *couldn't* be issued without a shareholder vote. This Einhorn fellow doesn't seem to like that for some reason. (Probably because he thinks it will be easier to convince the BOD to make a 'special exception' to their standard policy (just for him) than it would be to get the shareholders to vote in his favor.)

What confuses me is that the SEC had already approved the paperwork as being fine according to its rules, but the judge seems to have decided that the paperwork was too confusing according to SEC rules.
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Old Feb 23, 2013, 10:31 AM   #61
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[QUOTE=IJ Reilly;16893270]What prevents Apple from spitting those proposals into three separate measures for stockholder consideration? Seems to me that the board might just have been hoping to bundle two good corporate governance measures with an unpopular one on purpose. Seems to me Einhorn hasn't prevented anything but the bundling trick.[COLOR="#808080"]

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Nothing prevents unbundling......next time. For now, all bundled measures are dead until they can be resubmitted for vote with proper notice, etc.. Everyone is focused on the preferred, but what is the practical near-term effect from the "defeat" of the other two bundled measures?
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Old Feb 23, 2013, 10:46 AM   #62
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e. And without all these analyst and fund managers there is no way in hell Apple would have achieved the value it currently has. .[COLOR="#808080"]
[.

Yep. Without all those "analysts" and fund managers, aapl wouldn't have been subjected to all the games, bashing by cnbc talking heads, manufactured stories by the WSJ, rumors by the bloggers, or experienced anywhere near the volatility it has over the past few years, and now would be trading over $600 based on fundamentals.
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Old Feb 23, 2013, 11:04 AM   #63
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Originally Posted by mccldwll View Post
Nothing prevents unbundling......next time. For now, all bundled measures are dead until they can be resubmitted for vote with proper notice, etc.. Everyone is focused on the preferred, but what is the practical near-term effect from the "defeat" of the other two bundled measures?
Probably not much, unless Apple decides to punish the stockholders by not bringing back the two corporate governance measures as separate items next time. I doubt they'd pull that stunt under the new regime, but it wouldn't have been out of the question in years past.

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Yep. Without all those "analysts" and fund managers, aapl wouldn't have been subjected to all the games, bashing by cnbc talking heads, manufactured stories by the WSJ, rumors by the bloggers, or experienced anywhere near the volatility it has over the past few years, and now would be trading over $600 based on fundamentals.
And if it didn't rain, nobody would get wet. The markets have operated on the basis of guesswork, rumor and analysis since time immemorial, so complaining about it is like howling at the moon. The moon is never going to notice, so why bother? As for trading on the basis of fundamentals, when does that ever happen?
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Old Feb 23, 2013, 06:42 PM   #64
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I wonder what would happen if a fire had suddenly broke out at the next shareholders' meeting, and because of all this political theater, they decided to bar the doors. How much disruption to the markets would occur?
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Old Feb 23, 2013, 06:44 PM   #65
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Probably not much, unless Apple decides to punish the stockholders by not bringing back the two corporate governance measures as separate items next time. I doubt they'd pull that stunt under the new regime, but it wouldn't have been out of the question in years past.
Aapl agreed to the director majority measure a year ago (Feb 2012) so aapl won't backtrack, especially since Einhorn and not the stockholders at large.. However, not sure where that stands at the moment in present director voting since proposal withdrawn.
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Old Feb 24, 2013, 11:54 AM   #66
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Apple would have to come up with enough money to buy it out of the stock market. This typically comes at a premium as well.

AAPL currently has a market valuation of 425 billion dollars. Therefore, one could postulate that Apple would need to come up with over 500 billion in raw cash in order to take it private (assuming AAPL's market cap falls tremendously as well).

Over the next 5 or 10 years, it is tough to tell. If Apple can continually bank 50 billion per year while having it's stock grown 0% YOY (close to where we are at today), than certainly.

Remember though, Apple is at a low cycle in it's P/E valuation. It has dipped into the 10/11 range before, but has always rebounded back into the low 14s. At this point in time, it seems unlikely, but anything is possible.
But as you no doubt know, if Apple continues to bank $50 billion a year for years, its stock won't stay in the $400s, it would rise quickly.

Basically, a company can't earn money to take itself private. The money has to come from outside. In this case, something on the order of half a trillion of outside cash. Basically nobody except governments have that kind of money. So it is not possible for a private equity fund or management to take Apple private. It is just too big.

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It doesn't work that way nor should it. Look, we all see the value in Apple stock and as a company. But as a publicly traded company, Apple is responsible for generating as much value for our stocks as they can. Sitting on all of that cash is not generating any additional value. And without all these analyst and fund managers there is no way in hell Apple would have achieved the value it currently has. You don't cut off your nose to spite your face. What Einhorn is doing is smart. Because now he is indirectly putting Apple in a place where they have to do something or at some point the shareholders will begin to revolt.

----------

And everyone seems focused on proposal #2 and that is not what the judge ruled on. Apple tried to bundle three different issues into one vote. This is the same crap Congress pulls with their pork filled bills. Einhorn simply sued to make sure all three issues were voted on separately rather instead of one bundled vote.

Just because 2 of three sound great shouldn't force shareholders to vote yes that includes a yes vote for something they may not want. The only way this lawsuit is silly is if the shareholders would have voted yes on all three issues anyway but that doesn't give the Apple BOD the right to take away the shareholder's voices or votes. Every one deserves a vote on each issue just not as a combined/bundled vote. It's only fair and there is a reason the rules are in place.
Proposal Number 2 was all three of those issues combined. It is a confusing coincidence that the second of the three issues was the controversial preferred stock restriction. But this lawsuit is just about Proposal 2 and nothing else. There is now an injunction against considering Proposal 2. Apple could appeal this, but the shareholder meeting is this week, so there is fairly little time and the ruling is probably unlikely to get overturned anyway. Apple is just going to drop this. They can unbundle these issues and put them to a shareholder vote next time easily enough.

Otherwise, I totally agree with what you are saying. I suspect there is a good chance that Apple raises its dividend or does an additional stock buy back. No chance they issue preferred shares though. No particular compelling reason to do that instead of just a bigger dividend. And certainly board would look stupid and pushed around if it did exactly what Einhorn suggested. But a dividend or stock buyback gets Einhorn into the same place he wants.

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A floor is not what Einhorn wants. He wants the value to go up.

Issuing preferred stock raises capital, so it doesn't. Let's say they issue one share of preferred stock at $50. Then they only pay you $0.50 out of that $50 every 3 months. The net cash is +$50 right off the bat.

No, preferred stock does NOT dilute shareholder value unless it's converted. That's the whole purpose of issuing preferred stock - to not dilute the common stock - while raising working capital.
Einhorn is not suggesting issuing preferred for cash. Apple has cash and getting more in any form stock issuance would just exacerbate the problem. Einhorn is suggesting each shareholder get issued a preferred share for "free". Then shareholder can sell that preferred share if it wants cash (presumably the pref shares would sell for something around $50 (more or less)) or it can hold on to the preferred share and receive 4% of $50 each year forever (or until Apple goes bankrupt or redeems the preferred shares). Net cash out for Apple is just the yearly dividend. No cash in.

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This brings up an interesting question about the best way for a company to reward its shareholders. If it pays a dividend then the shareholders will be taxed on it at their standard tax rate, which varies based on your income.

If it does a buyback of shares then the stock price may go up and the shareholders will have a larger unrealized gain (assuming they bought in low). In this situation there would be no taxable event until the shareholder sells his shares, which could be years from now (capital gain). The tax rate will depend on what the long term or short term rates are, which changes all the time with new presidents and congress. But I believe those rates are lower than the standard rate that would be taxed for dividend income.

A rule of finance is to always defer taxes, so I would think that a buyback/capital appreciation would be better than a larger dividend now.

Just my $0.02 but what Einhorn did is great for shareholder rights. You fanboys who are complaining about this shouldn't be playing in the stock market if you can't appreciate the core issue of the lawsuit.
Dividends are also taxed at a different rate than standard income. It was 15% last year and is now 20%. For most shareholders (who are by and large well to do folks) this is substantially lower than their income tax rate.

Share buy backs don't trigger any tax result unless you are one of the folks selling your shares. So yes it is often viewed as a better way to return cash.
But for actual long term shareholders, it just raises the value of the shares, which does very little for those of us who don't expect to sell for years if not decades. Those holders would prefer a cash dividend and just deal with the taxes.
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Old Feb 24, 2013, 12:10 PM   #67
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But as you no doubt know, if Apple continues to bank $50 billion a year for years, its stock won't stay in the $400s, it would rise quickly.
Closer to $100b a year at the current rate, and not if they continue to stockpile the vast majority of the cash, it won't. The presence of liquid assets on a company's balances sheets doesn't have a material impact on stock valuation unless it is being paid out to the stockholders. That's money the stockholders can count. But you are right about going private. That's just a fantasy. Even at current valuations the sums are just too large, and any effort to bring in outside capitol would have to include a significant premium over the current market price, as it did with Dell. No way, and even more importantly, no reason.

Apple is already buying back shares but as with any stock buyback program the stockholders never know how much of this has actually been done. At the same time the company is constantly issuing grants and options to top execs. The result is probably a wash. Stockholders are rightly more excited about dividends than buybacks. Again this is money they can count.

The preferred share scheme is interesting, but I don't claim to understand its merits (if any) over a straight dividend. I wouldn't say that the board won't consider it seriously just because a large stockholder suggested it. This CEO is not as obdurate and stockholder hostile as the one we knew and didn't always love.
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Old Feb 24, 2013, 02:22 PM   #68
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can someone explain to me like a 9 year old on what the hell is going on?

how about explain it to me like a 5 year old?
Well the bottom line is that hedge fund managers want to get their hands on apples billions in cash reserves. This is just part of that battle to gain influence over the board and eventually make Apple into what every other public traded corporation has become.
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Old Feb 24, 2013, 02:58 PM   #69
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Well the bottom line is that hedge fund managers want to get their hands on apples billions in cash reserves. This is just part of that battle to gain influence over the board and eventually make Apple into what every other public traded corporation has become.
Sure, that must be it.
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Old Feb 24, 2013, 04:54 PM   #70
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for this and many other reasons...

I'm glad I sold all my apple stock a couple of weeks after we lost Steve!!!

I bought a lot when he came back to Apple but when he passed I just knew Apple was going to have many of the kinds of troubles we are seeing now... bad advice from bad (now ex) employees (good reddens Scott Forstall)... bad decisions for directions of hardware (new iMac and Macbook Pros)... and professional "stock" holders trying to pick the company apart!

What was the line used when the The Beatles broke up or was it when they pretended that Paul had died? Not really sure... anyway
The Beatles are dead... Welcome to the Rolling Stones!

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Old Feb 24, 2013, 05:33 PM   #71
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These calculator cronies need to stop trying telling innovators how to "manage their cash," and let them innovate.
LMAO

Asking Apple to increase the dividend does absolutely nothing to threaten their ability to innovate. Thats how much unused cash they have.

BTW I'm sure Apple had their own "calculator cronies" - remember this is the company that charges an additional $100 to increase storage in the iPhone from 16GB to 32GB. That is innovative!
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Old Feb 24, 2013, 10:14 PM   #72
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Closer to $100b a year at the current rate, and not if they continue to stockpile the vast majority of the cash, it won't. The presence of liquid assets on a company's balances sheets doesn't have a material impact on stock valuation unless it is being paid out to the stockholders. That's money the stockholders can count. But you are right about going private. That's just a fantasy. Even at current valuations the sums are just too large, and any effort to bring in outside capitol would have to include a significant premium over the current market price, as it did with Dell. No way, and even more importantly, no reason.

Apple is already buying back shares but as with any stock buyback program the stockholders never know how much of this has actually been done. At the same time the company is constantly issuing grants and options to top execs. The result is probably a wash. Stockholders are rightly more excited about dividends than buybacks. Again this is money they can count.

The preferred share scheme is interesting, but I don't claim to understand its merits (if any) over a straight dividend. I wouldn't say that the board won't consider it seriously just because a large stockholder suggested it. This CEO is not as obdurate and stockholder hostile as the one we knew and didn't always love.
It can't be $100 billion a year. You are assuming that every quarter is like the last quarter that was both the holiday quarter and just after an iPhone announcement. Apple should do about $50 billion in profits/cash by the end of September. Anything significantly over $60 billion would be nearly impossible.

It is understandable that it is hard to figure out the advantages of the preferred share scheme because there are very few. The basic move is to pay a dividend. But that means literally taking cash out of the bank and giving it to shareholders. So, if for some reasons there is actually a reason or situation where Apple could use that money then having paid the dividend would be bad. Einhorn does not believe Apple has any need for that money. Apple's board probably agrees with him. But assuming that we cannot see the future and it is possible that Apple will need the money, then you come up with the conservative solution that Apple keeps ahold of the cash and the preferred shares gets value to the shareholders without actually decreasing the cash reserves in any significant fashion.

The preferred shares are just a little bit different because they are a promise to play a dividend now and forever year after year. A promise to get cash yearly forever is worth something. So giving those preferred shares to shareholders would be valuable. And if you think Apple will have lots of cash for a long time, then it gives Apple something to do with that money. So the preferred shares will be worth some money and if Apple issues them, then Apple's shareholders will get something. But it won't initially be because Apple actually parted with cash it has for that unforeseen purchase I mentioned above. So shareholders win and Apple can still do some insanely large acquisition.

It is all kind of silly. And Apple is not issuing these preferred shares. That is mainly because, I think, Apples board knows that there is no reason for it hold onto all this cash. So if it wants to return cash to shareholders it might as well just do the regular dividend or stock buy back. Otherwise it can do nothing. And then it can revisit this issue when the cash pile approaches $200 billion.
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Old Feb 25, 2013, 10:14 AM   #73
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It can't be $100 billion a year. You are assuming that every quarter is like the last quarter that was both the holiday quarter and just after an iPhone announcement. Apple should do about $50 billion in profits/cash by the end of September. Anything significantly over $60 billion would be nearly impossible.

It is understandable that it is hard to figure out the advantages of the preferred share scheme because there are very few. The basic move is to pay a dividend. But that means literally taking cash out of the bank and giving it to shareholders. So, if for some reasons there is actually a reason or situation where Apple could use that money then having paid the dividend would be bad. Einhorn does not believe Apple has any need for that money. Apple's board probably agrees with him. But assuming that we cannot see the future and it is possible that Apple will need the money, then you come up with the conservative solution that Apple keeps ahold of the cash and the preferred shares gets value to the shareholders without actually decreasing the cash reserves in any significant fashion.

The preferred shares are just a little bit different because they are a promise to play a dividend now and forever year after year. A promise to get cash yearly forever is worth something. So giving those preferred shares to shareholders would be valuable. And if you think Apple will have lots of cash for a long time, then it gives Apple something to do with that money. So the preferred shares will be worth some money and if Apple issues them, then Apple's shareholders will get something. But it won't initially be because Apple actually parted with cash it has for that unforeseen purchase I mentioned above. So shareholders win and Apple can still do some insanely large acquisition.

It is all kind of silly. And Apple is not issuing these preferred shares. That is mainly because, I think, Apples board knows that there is no reason for it hold onto all this cash. So if it wants to return cash to shareholders it might as well just do the regular dividend or stock buy back. Otherwise it can do nothing. And then it can revisit this issue when the cash pile approaches $200 billion.
Apple's rate of cash accrual rate was about $10b/quarter only a couple of years ago, so it's easy to see where it approaches $100b/year in the near future. Either way, it seems likely that the $200b figure will be hit some time this calendar year, so the time for revisiting this issue is now. Long past, actually.

I basically agree with your analysis, but I am troubled by your references to "the money." The implication (the way I am reading it at least) is that Apple might just decide to declare a $100b+ dividend. A reminder that the current annual dividend is $10.60/share. Even if Apple went totally nuts and quadrupled the common stock dividend it would still not represent a decrease in their cash reserves, but rather only a decrease in its rate of growth. Cash reserves would continue to grow, and Apple still would not lose the ability to do anything it might reasonably want to do. I hope Apple never becomes one of those companies that does insanely large acquisitions. They hardly ever have happy endings.

I'm not sure if Apple could declare a preferred stock dividend without it being immediately taxable to the shareholders. If it is not a new stock offering then it should be treated as a dividend, as I understand it. Either way, presuming the preferred carries a yield, then this new dividend would be paid out of the company's cash reserves just the same as if it was paid directly to common stockholders. If it isn't a new offering then it's essentially a split from the common stock. This should not be immediately taxable but it would reduce the common stock value by the value of the spinoff. So it sounds like a wash to me.
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Old Feb 25, 2013, 11:32 AM   #74
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Apple's rate of cash accrual rate was about $10b/quarter only a couple of years ago, so it's easy to see where it approaches $100b/year in the near future. Either way, it seems likely that the $200b figure will be hit some time this calendar year, so the time for revisiting this issue is now. Long past, actually.

I basically agree with your analysis, but I am troubled by your references to "the money." The implication (the way I am reading it at least) is that Apple might just decide to declare a $100b+ dividend. A reminder that the current annual dividend is $10.60/share. Even if Apple went totally nuts and quadrupled the common stock dividend it would still not represent a decrease in their cash reserves, but rather only a decrease in its rate of growth. Cash reserves would continue to grow, and Apple still would not lose the ability to do anything it might reasonably want to do. I hope Apple never becomes one of those companies that does insanely large acquisitions. They hardly ever have happy endings.

I'm not sure if Apple could declare a preferred stock dividend without it being immediately taxable to the shareholders. If it is not a new stock offering then it should be treated as a dividend, as I understand it. Either way, presuming the preferred carries a yield, then this new dividend would be paid out of the company's cash reserves just the same as if it was paid directly to common stockholders. If it isn't a new offering then it's essentially a split from the common stock. This should not be immediately taxable but it would reduce the common stock value by the value of the spinoff. So it sounds like a wash to me.
Well I think you are a little more bullish on Apple than I, but not by much. I think they don't increase dividends or do any stock buy back and we are looking at $200 billion cash pile by the end of March 2014. It seems you think they hit that a few months earlier. Could be. Probably need a lot of iPad sales to do that, but that is possible.

But yes, any of the discussed dividend increases and such just slow the cash increase. Nothing that folks contemplate being on the table would actually result in a decrease in the current pile. Lots of the cash is overseas and Apple will not bring it to the US unless Congress changes the tax code to reduce the tax hit for that decision. If that doesn't happen or doesn't look likely, you will probably see Apple focusing more growth overseas so it can use that cash pile (which is about $90B of the $137B, right?)

It is going to be fun to watch. I can't wait to see how the current quarter is going. Also, shareholder meeting later this week should be interesting. While unlikely, I don't rule out a doubling of the dividend or a new stock buy back of, say, $10 billion. As you say, Apple will still accrue cash very quickly even with a larger dividend or stock buy back in that realm.
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Old Feb 25, 2013, 01:43 PM   #75
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Well I think you are a little more bullish on Apple than I, but not by much. I think they don't increase dividends or do any stock buy back and we are looking at $200 billion cash pile by the end of March 2014. It seems you think they hit that a few months earlier. Could be. Probably need a lot of iPad sales to do that, but that is possible.

But yes, any of the discussed dividend increases and such just slow the cash increase. Nothing that folks contemplate being on the table would actually result in a decrease in the current pile. Lots of the cash is overseas and Apple will not bring it to the US unless Congress changes the tax code to reduce the tax hit for that decision. If that doesn't happen or doesn't look likely, you will probably see Apple focusing more growth overseas so it can use that cash pile (which is about $90B of the $137B, right?)

It is going to be fun to watch. I can't wait to see how the current quarter is going. Also, shareholder meeting later this week should be interesting. While unlikely, I don't rule out a doubling of the dividend or a new stock buy back of, say, $10 billion. As you say, Apple will still accrue cash very quickly even with a larger dividend or stock buy back in that realm.
Without resorting to calculations, the trajectory seems to put cash in the neighborhood of $200b within three or four quarters. Plus or minus a bit doesn't much matter. Soon or sooner.

I don't know the breakdown of overseas money vs. funds held in the U.S. offhand, but it seems to me more political gamesmanship than anything else when corporations argue for repatriation holidays. They will shift the money to the U.S. when they need or want it, either way. Waiting for Congress to give you a special deal may be good politics, but it is bad business. Apple should and I think will focus capital investments where they have the best growth opportunities. That's probably not in the the U.S. right now anyway. And keep in mind, they have more than enough capital to expand wherever they want, so I don't think where they have the money stashed is a huge issue.

We don't know if the buyback program the board initiated last year was ever spent out. At this point though they should probably be buying back/supporting the stock price when the multiples drop way low, as they have recently.
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