Carl Icahn Increases Apple Stake to $2.5 Billion, Requests Immediate $150 Billion Stock Buyback

[jdechko]

I've been in AAPL since 1997 and I will cash out eventually too. The idea is to make as much money as possible before then. Really. Call me a leech if you must.

That's not the point I was trying to make at all. The goal of any business is to make money, and investments are no different. You're not a leech, and I never said you or any other investor (besides Icahn) was. And perhaps "leech" isn't the best term. Anyway...

Whether you invest $100 or $100 million, the ultimate goal of an investor is to make as much money as possible.

I wouldn't expect Apple to take on Icahn's plan entirely, but it's telling that they have already done so in part with the first borrow-to-buyback plan currently underway. The concept is to not cut into the cash mountain very much but instead to borrow (at today's ultra-low interest rates) and pay it back via future cash flows. The debt is pretty short-term. I believe the longest bonds are two years. Even under Icahn's highly aggressive buyback proposal, Apple has as much cash in its larder after the buyback as before. Unless the business fails, of course.

We can only speculate as to what Apple's intentions are with respect to their cash reserves, any future debt and potential stock buyback. However, Icahn's history speaks volumes towards his own intentions.

For what it's worth, I don't disagree with you about the financials. Borrowing money at a really low interest rate can make sense in some situations.

 

[MacMulti]

He urge Apple to buyback so he can sell. Simple as that

 

[uhaas]

Buy $2.5B in stock.

Convince company to go on a buyback program, stock shoots up.

Sell stock at a huge profit.

Thank you for playing.

 

[imageWIS]

Stock Manipulation?

This makes Gordon Gecko look like a back seat investor.

This was pretty much the plot of the mediocre Wall Street 2.

 

[synp]

Not quite

Buy $2.5B in stock.

Convince company to go on a buyback program, stock shoots up.

Sell stock at a huge profit.

Thank you for playing.

People keep repeating this. It's false.

If Apple spends $150B buying back stock, this reduces the value of the company by the same amount. The market cap would drop by $150B, so the value of an individual remaining stock stays the same. Icahn can only make a profit on this in two ways:

1. Future increases in the value of the company are distributed among fewer stock holders, increasing his share of them
2. Making this move signals that Apple is now distributing profits, so this makes its stock more valuable compared to a company that doesn't. Probably meaningless, as Apple is already buying back stock.

 

[IJ Reilly]

People keep repeating this. It's false.

If Apple spends $150B buying back stock, this reduces the value of the company by the same amount. The market cap would drop by $150B, so the value of an individual remaining stock stays the same. Icahn can only make a profit on this in two ways:

1. Future increases in the value of the company are distributed among fewer stock holders, increasing his share of them
2. Making this move signals that Apple is now distributing profits, so this makes its stock more valuable compared to a company that doesn't. Probably meaningless, as Apple is already buying back stock.

Absolutely not. Apparently you have no idea what market cap means.

 

[synp]

Absolutely not. Apparently you have no idea what market cap means.

Market cap is the multiplication of stock price by stock count. The buy-back reduces the stock count. Stock price is, as always, determined by market forces, but for starters, it stays the same, meaning that market cap just went down $150B.

How the stock will fare later on can only be speculated upon, but historical data suggests that stocks don't rally in response to buy-back.

 

[lildimsum7]

Market cap is the multiplication of stock price by stock count. The buy-back reduces the stock count. Stock price is, as always, determined by market forces, but for starters, it stays the same, meaning that market cap just went down $150B.

How the stock will fare later on can only be speculated upon, but historical data suggests that stocks don't rally in response to buy-back.

But the stock price is always changing. The way I see it, buyback reduces Apple's borrowing base (less shares), so now each share is more valuable because they then represent a larger ownership than before the buyback.

 

[IJ Reilly]

Market cap is the multiplication of stock price by stock count. The buy-back reduces the stock count. Stock price is, as always, determined by market forces, but for starters, it stays the same, meaning that market cap just went down $150B.

How the stock will fare later on can only be speculated upon, but historical data suggests that stocks don't rally in response to buy-back.

No, it did not. Cash has nothing to do with market cap. A fuller explanation would require an understanding of earnings and multiples, at a minimum.

 

[synp]

But the stock price is always changing. The way I see it, buyback reduces Apple's borrowing base (less shares), so now each share is more valuable because they then represent a larger ownership than before the buyback.

Borrowing base is the wrong term, because stocks are not bonds. Sure, after a buy-back, you (and Icahn) own a larger portion of Apple. OTOH The expenditure makes Apple less valuable, so you own a bigger piece of a smaller pie.

When evaluating a company, the usual method is to add residual value to present value of future revenue. Assuming this doesn't hurt Apple, the future revenue remains unchanged, and the same goes for present value.

The residual value does decrease by $150B. Residual value is the value we would get if Apple closed right now, That is the cash it has, plus whatever we can get by selling off real estate and IPR, minus any debt.

----------

No, it did not. Cash has nothing to do with market cap. A fuller explanation would require an understanding of earnings and multiples, at a minimum.

Cash has nothing to do with market cap, except that it has everything to do with company valuation, at least when it's done by rational people. And that affects stock prices.

 

[mrxak]

Speaking as an investor myself, the stock is undervalued, and Apple should do a buyback. Icahn is exactly right on those facts. Apple is doing a buyback, though, and good for them. The timing of it, and the size, is really up to Apple, though, not Icahn, and not me, though we both have the right to let our opinions known to the board and CEO. The only thing investors like myself and Icahn can do is vote out the board if we don't like how they're running things, but neither of us has enough votes to make that happen.

Everyone yelling at Icahn to shut up, give it a rest. He's not hurting anybody with his letters or lunch meetings. He's also not doing anything unusual, here. Shareholders have a right to express themselves and often do. There's even an annual meeting dedicated to exactly that activity where even somebody with a single share can tell the board whatever they want. You also overestimate Icahn's influence quite a bit. He owns a minuscule amount of the company, and can't possibly bully anyone. If he happens to have a good idea that Apple hadn't thought of before, Apple might go along with it. If he has only bad ideas, Apple will ignore them.

The takeaway from all of this is that AAPL is cheap right now, and if you're smart you should increase your position in the stock. Better investors than you clearly think so. Icahn isn't the only one buying up cheap AAPL.

 

[Bug-Creator]

Apple's market cap won't decrease if there is a massive buyback. Instead of 908 million shares worth 483 billion, there will be 635 million shares worth 483 billion. Each individual share would be worth about 33% more. Specifically, Icahn's 2.5 billion investment would be worth around 800 million more.

How much of that market cap is there just because Apple does have those massive cash-reserves ?

Burning those in a stock buyback isn't really anything else but handing them out as dividents, both will decrease the actual overall value of a company (wether that will be reflected in stock prices and market cap is another question).

 

[macs4nw]

this guy is truly a pain in a.s.s

And sadly he's not going away anytime soon, guaranteed!
Stock buybacks are a good idea, but at Apple's terms, not iCahn's!

…..AND at the end, has said HE would not participate in a buyback!!!!! So he won't give up his $2.5B - That is about as transparent as it gets. He is just a complete 'Billionaire' Douchbag.

Telling indeed! What I have the most problem with, is his 'open letter' where he basically publishes to the world what was ostensibly discussed at the private and confidential meeting he had with Cook, and also how he purports to speak for Cook:

"When we met, you agreed with us that the shares are undervalued. In our view, irrational undervaluation as dramatic as this is often a short term anomaly. The timing for a larger buyback is still ripe, but the opportunity will not last forever. While the board’s actions to date ($60 billion share repurchase over three years) may seem like a large buyback, it is simply not large enough given that Apple currently holds $147 billion of cash on its balance sheet, and that it will generate $51 billion of EBIT next year (Wall Street consensus forecast)".

Is he possibly trying to embarrass Tim, and manoeuver him into a corner where, when he doesn't follow Icahn's advice, Icahn can then later proclaim to the world, "I told him so, but he wouldn't listen".

…..If the stock is undervalued, why doesn't he buy more?

Good one!

Btw, stock buybacks, unless they are total, and 100% complete buybacks, increase the value of the remaining (non bought-back) shares, so Icahn's proposed $150 billion buyback, would net him a huge return on his investment.

 

[hpe]

Hp

The intent has to be to deliberately mislead. Stock analysts make predictions and offer their opinions all the time. So long as their intent is not to be deliberately false or misleading, then this is not only perfectly legal, it's their job.

Yes and no, most analysts are prevented for buying and selling the securities they are monitoring. During black-out periods, which the financial institutions have just before and just after issuing an analyst-report.

This is for brokers, prop-traders at banks and some other people.

A private investor like Mr. Ichan is only obliged to not lie about what he is doing on order to move the stock in any direction. What he is doing now is not illegal. I do agree with him, but not on the magnitude. The buy-back should be 50-100B.

/HP

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But the CEO runs the company, with overview by the board of directors, and their job is actually to look after the company and make sure that it does what it was set up to do. Shareholders are not legally owners, or they would be responsible to pay for debts of bankrupt companies as well.

And there is most definitely nothing that says Apple has any duty to increase the short term share price. Especially when there are long term investors who might see their share price in five years time suffering from bad decisions made today.

Actually, that is precisely what they are. But their responsabilities are limited to the money invested. It is one of the basic ideas behind equity based companies. You are correct in the long versus short term though...

/HP

 

[synp]

How much of that market cap is there just because Apple does have those massive cash-reserves ?

64 billion.

----------

Speaking as an investor myself, the stock is undervalued, and Apple should do a buyback.

Market cap is 483 billion. You say it's more. How much, and how did you come by this number.

 

[SusanK]

Is he possibly trying to embarrass Tim, and manoeuver him into a corner where, when he doesn't follow Icahn's advice, Icahn can then later proclaim to the world, "I told him so, but he wouldn't listen".t.

That ball has always been in Cook's court. No reason to meet with Ichan. Cook is weak.

 

[IJ Reilly]

Cash has nothing to do with market cap, except that it has everything to do with company valuation, at least when it's done by rational people. And that affects stock prices.

You must mean unknowledgeable people.

The most important single thing to understand is that material assets do not belong to the stockholders of a public company. Equity is what they own. The cash and other assets accumulated by the company (as represented by book value) are only of interest to investors if the company should (1) be taken over in its entirety by someone else, or (2) the company is liquidated in bankruptcy. In the first case, the cash and other assets are now owned by the buyer, as they now own the company lock, stock and barrel; so, the book value might have an impact on the takeover price. In the second case, some of the assets of the company might be used to pay off stockholders, but only rarely. Bankruptcy is designed to make creditors whole, and since stockholders are not creditors, they typically get nothing in a bankruptcy.

So, do you think either case (1) or case (2) are likely for Apple? Of course not. Consequently cash is an intangible asset as far as investors are concerned, unless the company decides to pay a dividend or buy back shares. Both of which Apple is presently doing.

As I said above, an explanation requires an understanding of earnings and multiples, since this is how stocks are valued. Equity investors are interested in earnings per share (EPS). If a company with a million shares outstanding earns $10 million, then EPS is $10.00. If the price to earnings ratio (PE) for the stock is 10, then the stock will trade at $100.00. If with the same earnings, the company buys back half of their shares, then EPS will be $20.00. Holding the PE constant at 10 (and there's no reason why it should change in this scenario), then the shares would trade at $200.00, each share now representing twice as much of the company's earnings as before the buyback.

This is why stockholders like buybacks. It is not a zero-sum game.

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How much of that market cap is there just because Apple does have those massive cash-reserves ?

None. See above.

----------

Yes and no, most analysts are prevented for buying and selling the securities they are monitoring. During black-out periods, which the financial institutions have just before and just after issuing an analyst-report.

This is for brokers, prop-traders at banks and some other people.

A private investor like Mr. Ichan is only obliged to not lie about what he is doing on order to move the stock in any direction. What he is doing now is not illegal. I do agree with him, but not on the magnitude. The buy-back should be 50-100B.

To not deliberately mislead. Call it lie, if you must. If they trade on the misleading or false information, then the SEC will come knocking. They also know about proxies and those sorts of dodges.

You may recall the false alarm about Steve's death that we went through a few years back. Some news service even ran an obit. Steve was very much alive at that point, but the stock tumbled just the same. Investors made and lost money that day. Was anyone prosecuted for the story? As I recall, it was investigated by the SEC but in the end judged to be a honest mistake. So it wasn't a violation.

 

[jdechko]

Well stated, IJ Reilly.

If you have an opportunity, the letter from Icahn is quite interesting.

http://allthingsd.com/20131024/icahn-to-apple-i-want-a-150-billion-buyback-now/

 

[absurdamerica]

What's laughable is you don't get the simple comparison. What don't you get how credit works? Icahn wants to leverage Apple's assets to get the loan to buy back shares, that's the same as credit. It's all about the borrowing.

It's the same for a lot of people getting loans, always look at the upside, never look at the downside...

Actually, I know exactly how credit works, and if I'm currently "saving" 46 billion dollars a year (Apple's 2012 profit) after expenses are paid (including existing loans I might add) , I'm a great loan risk for a 150 billion dollar loan paid back over 10 years.

What's laughable is you think that's not the case.

 

[IJ Reilly]

Well stated, IJ Reilly.

If you have an opportunity, the letter from Icahn is quite interesting.

http://allthingsd.com/20131024/icahn-to-apple-i-want-a-150-billion-buyback-now/

Interesting, thanks. Everyone should read this so perhaps they will better understand what is being proposed and why. The main point that I think generally escapes notice is that Apple is not a bank or an investment company, but holding $150 billion (and growing) requires that they be both. Smart companies draw to their strengths. If Apple can't use their free cash to grow the business they are in, then the question of why they are holding the cash and accumulating more, and how they will manage these assets is a natural one to ask. Under Steve's reign, the question was simply ignored. Tim, to his credit, is running Apple more like the huge corporation that it is, and isn't playing "talk to the hand" games when it comes to investor relations.

 

[lildimsum7]

Borrowing base is the wrong term, because stocks are not bonds. Sure, after a buy-back, you (and Icahn) own a larger portion of Apple. OTOH The expenditure makes Apple less valuable, so you own a bigger piece of a smaller pie.

Oh man, you're getting me really confused. I view equity as shareholders basically lending their money to the company in exchange for ownership, which is why I said "reducing borrowing base." I read a 51 page paper on repurchases just to make sure I understand the mechanics of it: http://csinvesting.org/wp-content/uploads/2012/06/corporate-structure-and-stock-repurchases.pdf

Think about this logically: when there are fewer shares outstanding, each share becomes more valuable because the shares have a larger claim on Apple's assets and earnings. Apple is just exchanging cash for treasury stock. It doesn't negatively impact the value of Apple in any way. Why would it? Apple isn't losing anything from buying back stock!

 

[IJ Reilly]

Oh man, you're getting me really confused. I view equity as shareholders basically lending their money to the company in exchange for ownership, which is why I said "reducing borrowing base." I read a 51 page paper on repurchases just to make sure I understand the mechanics of it: http://csinvesting.org/wp-content/uploads/2012/06/corporate-structure-and-stock-repurchases.pdf

Think about this logically: when there are fewer shares outstanding, each share becomes more valuable because the shares have a larger claim on Apple's assets and earnings. Apple is just exchanging cash for treasury stock. It doesn't negatively impact the value of Apple in any way. Why would it? Apple isn't losing anything from buying back stock!

Stockholders have a "claim" on earnings, yes. But on assets, not at all. You are being confused by the unnecessary reference to residual value (aka, book value). If the company actually liquidated, the stockholders would likely get zero.

 

[rish]

Icahn Place My Self Interest Over Others...

...simply because I have have the financial influence to do so, and should I be thwarted then I shall garner numbers until I get what I want.

This is the precise kind of human being that a strong company like Apple can do without. Icahn is one to create the rippling effect all motivated by his shear greed and total self interest that will be felt through an entire company and it's associates all the way down to the lone factory worker at the start of the line who will be left with no job and no future to carve out for themselves.

Someone who has it all but wants even more disregarding the those who have very little and work hard to try and dig themselves out of the shacks in which they live to build a brighter future for themselves and their dependants.

This make me very angry.

 

[Kirb112]

This is not a question of knowing better. This is a question of perspective. Icahn has been an Apple investor for how long? So, his interest is securing a short term profit out of his investment. His plan will help achieve that. The problem is that short-term gains are often in contradiction to long-term success. So one can say Icahns plan is bad for Apple even though it may be a good plan from Icahns perspective.

Well-said

 

[skinned66]

BORROW money to pay shareholders. Brilliant idea!

How old is this guy anyway? Is The Reaper on vacation? Do everyone a favour.