Carl Icahn Pushed for $150 Billion Stock Buyback at Dinner with Apple CEO Tim Cook [Update: Has $2 Billion Invested]

[sanook997]

doom! Dooom! DOOOOM!!! apple is so DOOOMED!

seriously. do you know how dramatic that post comes off? cook is continuing to run the biggest and most profitable tech company in history, as he had for years under jobs. theyre fine. im fine. youre fine. everybody's fine.

Yeah, most people really don't get it, the most Icahn can be is a nuisance, like a fly at a picnic. Two billion might mean a lot to most companies but in Apples world at ~$500 a share he now owns ~.0044 % of Apple. He and many like him cannot muster up enough money to control any part of Apple.

But I sure do like his logic, love to see Apple take 300M shares off the table!

 

[macs4nw]

Steve would be spinning in his grave if he read that. I think Apple are about more than that, like making great products.

Agreed 100%. There has never been a scintilla of evidence that Steve was in it for the money, or even cared all that much about money.

Hahahaha!!
Icahn: You need to increase the share buyback to $150B.
Cook: Okay! We start with yours! Now, get the heck out of here!

Thanks for my daily 'humor fix'.

…..Please Tim just tell him to **** off.

He would probably love to. However realistically, he can't ignore him. I have a feeling Icahn's voice will be heard a lot more in the coming weeks/months.

It's obvious he didn't get the answer he wanted. The very fact that this guy is tweeting about it, it's obvious. This way, when it doesn't happen, Icahn wants Cook to have egg on his face. "The shareholders of the world will know I tried, but Cook just wouldn't listen!"

Sounds very plausible, and even more reason for many ordinary people to have a deep-seated distrust of the Icahns of the world.

I already corrected you in the last thread about bringing up the Dell transaction and it seems you are being willfully ignorant or just intellectually dishonest…..

If you are the stock market expert you want us to believe you are, you would calmly explain your opinion to that poster, and to most of us, who are less knowledgeable about these affairs, rather than resort to condescending rebuttals.

People are allowed to state their opinion, even if you believe they are wrong, without being talked down to.

Yes of course, let's transfer the wealth that Apple has accumulated based on its engineering/design prowess to a bunch of parasite stockholders who just want to buy a new BMW tomorrow and don't give a hoot what happens to Apple. Such a prudent path...

Gotta love the buyback/Wallstreet apologists here, defending a system that has decayed into a pit of unregulated greed. They are a bit too obvious in their cheerleading.

I suspect this is the opinion of most of us 'uninformed, misguided souls'. But of course "we don't get it".

 

[aliasfox]

that's correct. That's the risk you take with AAPL, they make hits like Pixar, if you want constant solid contractual based revenue streams MS or Oracle would be a better company to invest. I guess their transition to solid revenue streams would be their iCloud strategy.



$10B in M&E (machine/equipment)... it's alot less for R&D.
$30B in M&E is probably not possible, it's a slow ramp up. Spending $8B on M&E was looked on as outrageous in the tech industry (only oil companies spend that for big projects).

It's easy to throw numbers around and say invest x Billions in R&D or Machine & Equipment, but short of an acquisition, it's hard to spend (without being foolish).

Apple has already underwriting Foxxconns' machinery, Sharp's displays, and more recently TSMC managed Fab... but it takes *years* to build out... it's not about not having the money. Likewise For R&D, just hiring 10,000 R&D engineers won't get you a new product ... they'll most likely be more unfocused and likely collapse from the admin.

Apple has the money, they don't have time to allocate it, so it's sitting there growing.

Understood, and I agree with all of those. I just think they could be doing so much more - maybe it's a matter of time and timing, maybe it's a matter of focus, but it's not like Apple *doesn't* have obvious places that are currently dragging - I'm sure we can both agree on that.

As for acquisitions, I think they could definitely do more. I'm sure they've thought of some of these and rejected them, but given the amount of money they have, buying a large stake in companies that Apple's weak in might not be a bad idea:
- Netflix (content and rental-content delivery)
- Pandora/Spotify (though they did purchase something small that was similar)
- Garmin (Maps!)
- Square (mobile payments)

Just some thoughts.

 

[rillrill]

this is the end

http://www.youtube.com/watch?v=JSUIQgEVDM4

 

[TallManNY]

Ok, then why not just cut to the chase and give the shareholders most (not all) of the money back as a one time (or otherwise) dividend?

This way it's not "guessing" if the the stock will rise due to buyback, it's going directly back to the shareholder for them to do as they please (which includes buying back the stock on their own).


.

Tax reasons. If you pay a dividend, then all shareholders get paid and recognize that as taxable income. If you do a buyback only shareholders who sell (a voluntary action) will recognize a gain (or loss) depending on their gain and loss on that sale. The shareholders selling for cash might very well be offsetting their gains against loss in other stocks. Or they might be folks who bought in at $700 last year and they are taking their loss now for a write off. This is the main tax advantage.

There used to be a big difference though between how the income from dividends and capital gains on the stock were taxed. Now sometimes dividends are taxed as ordinary income, which is much higher than the capital gains tax. Most folks though would receive the dividend as qualified dividend which is taxed at the same low capital gains tax. So there isn't much difference here now.

 

[Glideslope]

Never should have done the IPO. Carl want's Art's Job, and don't dare to think for a moment he does not.

 

[paul4339]

Tax reasons.....

Agreed.. completely.

 

[macgabe]

A lot of people don't seem to understand what a stock buy back is.

A buy back simply uses Apple's cash in the bank to buy back shares. Since there would then be fewer shares of the same company, each share (i.e. stock price) should be worth more. It's basically a way of transferring cash earned to shareholders.

The other obvious way of doing it is with dividends, but that is annoying for many because tax on dividends is often at 30%+ but tax on capital gains can be as low as 0% depending on your location, situation etc.

However in this case, since most of Apple's $150B is held abroad, Icahn wants Apple to borrow the $150b and use that money to buy back the stock. Which he reckons will cost about $3b. So they're not actually using the cash to buy back stock - Icahn wants them to leverage their cash to borrow at cheap rates and use that cash for the buy back. (Which they are already doing albeit at a smaller rate).

This will hardly help Apple as a business in any way. It makes little difference to the company, other than their stock price will probably go up and they'll have less cash in the bank. To the extent that they use their stock as a cash or incentive (to pay employees etc) it does have a benefit. But they've got plenty of cash to pay their employees. It's not about "going private". The only good reason for doing it, is that if as a company you think your stock is undervalued by the market, then in effect you are making a good investment by buying your own stock. If your stock doubles subsequent to your buy back you have effectively doubled the value of the cash you had in the bank. Currently Apple has a very low p/e ratio compared to other companies, especially such successful ones, so arguably, at least on that metric, it certainly is undervalued.

But they can't currently bring that cash back from abroad without losing about 30% in taxes. So they will be left with a big cash pile abroad, which they can't do much with other than expand abroad, and on which they will incur taxes if they repatriate, and then a huge debt in America, surely one of the biggest ever debt issuances of its kind. JPMorgan, Goldman Sachs and Morgan Stanley must be drooling at the thought of their cut of the bond issuance.

So what else can they do with their cash? Well they can keep it for a stormy day - that was Steve Jobs' basic idea. Times are great now for Apple - they invented two new product categories in the last ten years which have taken the world by storm, but competition is fierce, and their competitors now try to predict their every step, so who knows whether their next great idea will be so lucrative. In fact nearly all phones which once reigned supreme have pretty much gone to the wall, Nokia, Ericsson, Sony, Motorola. And the same can be said for many computer makers too, Dell PC's being one of the latest casualties.

Even mighty chipmakers like Intel have had the tables turned on them by the likes of Arm. In this kind of environment a tech company can burn through $50b in a surprisingly short space of time. In fact if Apple hadn't been bailed by Microsoft in the 90's they might not be here today. Having a huge cushion of cash allows them to take risks that otherwise might sink a company if they turn out unsuccessful.

They can also make acquisitions. Might have been a nice idea to add say a Netflix to their iTunes offering. Well they're worth $18b, they could probably buy them for double that. if ever the Chinese market opens up, they might need to do some acquisitions there. You can't do that kind of move easily if you've only got $10b in cash. Get it wrong like HP did with Autonomy and next thing you know you're writing off $8.8b.

And they need tens of billions for their own R&D, including their big push into chip design, which seems to be sucking up billions. They also need tens of billions to equip contract manufacturers for their huge product throughput. Fortunately Apple will be making another $50b or so next year, so the coffers should fill up again.

On the other hand, the downside of having such a huge amount of cash on their balance sheet (other than it being an inefficient use of resources) is that it makes them the number one target of bankrupt governments and greedy wallstreet bruisers like Icahn. That cash pile is like a huge goldmine just waiting to be raided by hostile outsiders. And that's exactly what's happening now. First Einhorn threatens to sue Apple if they don't distribute cash. Then Congress goes after their overseas stockpile as somehow "unAmerican" (despite the fact that they're already a huge taxpayer and employer in America) and now Icahn, the biggest baddest corporate raider of them all, has Apple in his crosshairs.

Let's get it straight, he does not give a **** about Apple's long term future, whether they have the latest greatest gadget or computer, or anything to do with their business. All he cares about is buying the stock at $400 and flipping it at 2 or 3 times the price. If that means making veiled threats, attacking Tim Cook and the board in the press, getting them fired, getting himself a seat on the board, rounding up his sleazy Wall Street billionaire cronies for a proxy fight, whatever, he will stop at nothing.

Now that may be good for stockholders, especially if all you want is to buy at $400 and flip it at $800. But it may also wreck the company. Bear in mind Apple may well make it back to $800 without Icahn's help.

 

[paul4339]

...

As for acquisitions, I think they could definitely do more. I'm sure they've thought of some of these and rejected them, but given the amount of money they have, buying a large stake in companies that Apple's weak in might not be a bad idea:
- Netflix (content and rental-content delivery)
- Pandora/Spotify (though they did purchase something small that was similar)
- Garmin (Maps!)
- Square (mobile payments)

Just some thoughts.

How about foreign acquisitions (greater leverage into Asia and other emerging markets)?
Or (just throwing this out for kicks...)... Intel?

.

 

[IJ Reilly]

Tax reasons. If you pay a dividend, then all shareholders get paid and recognize that as taxable income. If you do a buyback only shareholders who sell (a voluntary action) will recognize a gain (or loss) depending on their gain and loss on that sale. The shareholders selling for cash might very well be offsetting their gains against loss in other stocks. Or they might be folks who bought in at $700 last year and they are taking their loss now for a write off. This is the main tax advantage.

There used to be a big difference though between how the income from dividends and capital gains on the stock were taxed. Now sometimes dividends are taxed as ordinary income, which is much higher than the capital gains tax. Most folks though would receive the dividend as qualified dividend which is taxed at the same low capital gains tax. So there isn't much difference here now.

Bottom line, not much difference in terms of tax liability, unless you are able to time your capital gains for best tax advantage purposes (offsetting loses, mainly). The big difference is dividends are guaranteed and capital gains are not.

----------

How about foreign acquisitions (greater leverage into Asia and other emerging markets)?
Or (just throwing this out for kicks...)... Intel?

Ask yourself who and why. I've never come up with or heard a plausible acquisition scenario that requires anything like the amount of money Apple has stockpiled. Most large mergers and acquisitions are disastrous anyway. Wish them on companies you want to see fail.

 

[TallManNY]

So what else can they do with their cash? Well they can keep it for a stormy day - that was Steve Jobs' basic idea. Times are great now for Apple - they invented two new product categories in the last ten years which have taken the world by storm, but competition is fierce, and their competitors now try to predict their every step, so who knows whether their next great idea will be so lucrative. In fact nearly all phones which once reigned supreme have pretty much gone to the wall, Nokia, Ericsson, Sony, Motorola. And the same can be said for many computer makers too, Dell PC's being one of the latest casualties.

Even mighty chipmakers like Intel have had the tables turned on them by the likes of Arm. In this kind of environment a tech company can burn through $50b in a surprisingly short space of time. In fact if Apple hadn't been bailed by Microsoft in the 90's they might not be here today. Having a huge cushion of cash allows them to take risks that otherwise might sink a company if they turn out unsuccessful.

They can also make acquisitions. Might have been a nice idea to add say a Netflix to their iTunes offering. Well they're worth $18b, they could probably buy them for double that. if ever the Chinese market opens up, they might need to do some acquisitions there. You can't do that kind of move easily if you've only got $10b in cash. Get it wrong like HP did with Autonomy and next thing you know you're writing off $8.8b.

And they need tens of billions for their own R&D, including their big push into chip design, which seems to be sucking up billions. They also need tens of billions to equip contract manufacturers for their huge product throughput. Fortunately Apple will be making another $50b or so next year, so the coffers should fill up again.

Now that may be good for stockholders, especially if all you want is to buy at $400 and flip it at $800. But it may also wreck the company. Bear in mind Apple may well make it back to $800 without Icahn's help.

I largely agree with you, but would like to quibble a bit.
Apple does not spend "tens of billions on their own R&D". Maybe this ramps up in the future, but they are still solidly in the single digits. I believe they went from 1.5 Billion to 3 billion, then to 4 billion. But they aren't going to get to spending tens of billions anytime soon and most likely ever.
Second I think you grossly overestimate how much Apple spends on its manufactures to set them up. And even if they do spend that money, they are doing it only because of the billions in profit from sales. How long do you think it took to ramp up iPhone 5S production at a specific manufacturing plant? Two months before the first iPhone was made and then sold three weeks later. Apple has to spend money, but it doesn't need capital reserves in the tens of billions that it has to spend and keep outstanding for months or years before it gets a return. This all happens very fast. R&D is fairly small potatoes and construction costs for phones and tablets are incurred only weeks ahead of the actual sale to a customer.

You also say that companies burn through $50 billion in a surprisingly short amount of time. Actually that isn't true. That is just too much money. I can't think of any company which has "burned" through that kind of cash in anything short of a many many years. Now a company might lose that amount in their market capitalization, but to actually be cash flow negative to the tune of $50 billion is nearly inconceivable for a manufacturing company. It would take a decade of terrible failure. Every current iPhone user on the planet could take a pledge to not buy apple products for a decade, and Apple wouldn't burn through $50 billion (largely because they can ramp down their manufacturing very quickly). Apple's costs are largely based on physically making goods. They have a very very good idea about how many of those devices will get sold, those devices sell at nice margins, Apple knows real time what is getting sold, and Apple can respond quickly to demand changes. Worst worst case, the devices can be sold at cost as Apple ramps down on some future dud product. It is very hard for Apple to lose money in the billions.

Even BBRY's disastrous last quarter was a cash flow $500 million loss. They immediately lowered costs by firing employees and you can be sure they aren't ordering large numbers of future phones.

 

[IJ Reilly]

You also say that companies burn through $50 billion in a surprisingly short amount of time. Actually that isn't true. That is just too much money. I can't think of any company which has "burned" through that kind of cash in anything short of a many many years. Now a company might lose that amount in their market capitalization, but to actually be cash flow negative to the tune of $50 billion is nearly inconceivable for a manufacturing company. It would take a decade of terrible failure. Every current iPhone user on the planet could take a pledge to not buy apple products for a decade, and Apple wouldn't burn through $50 billion (largely because they can ramp down their manufacturing very quickly). Apple's costs are largely based on physically making goods. They have a very very good idea about how many of those devices will get sold, those devices sell at nice margins, Apple knows real time what is getting sold, and Apple can respond quickly to demand changes. Worst worst case, the devices can be sold at cost as Apple ramps down on some future dud product. It is very hard for Apple to lose money in the billions.

More to the point IMO is that spending even a dollar of reserves to cover cash flows means the company has gone from being profitable to unprofitable. Apart from what that means to a stockholder (a fire sale price) is the question of what well-run company would hold large quantities cash against such an eventuality. The answer is, none. Would it inspire the confidence of investors if they did?

In his day Steve Jobs never had a good explanation for why Apple needed to stockpile more and more cash. His answer when asked was basically "talk to the hand." Savvy investors began to wonder what it was all about. Does the company (1) lack confidence in the future, or are they (2) planning some acquisition larger than anything known to history? Both explanations are matters of concern to investors and the concerns grow along with the cash horde. Tim Cook seems to understand the bad messaging that comes along with cash hoarding. Steve, for all his other merits, apparently never did.

 

[AidenShaw]

Yes of course, let's transfer the wealth that Apple has accumulated based on its engineering/design prowess to a bunch of parasite stockholders who just want to buy a new BMW tomorrow and don't give a hoot what happens to Apple. Such a prudent path...

Yeah, heaven forbid that the owners of the company want to maximize their return.

Thanks, Badandy.

I think a lot of people here on MacRumours thought that Steve Jobs owned Apple, and Tim Cook inherited it when the black-turtleneck left. How silly....

 

[rocknblogger]

Tim Cook is now in danger of undoing all that Jobs has achieved at Apple, in RECORD TIMING.

I hope Tim Cook and Apple's Board wise up soon -- if not, it would be all too late and this would be the beginning of the end for Apple.

Even as an Apple shareholder, I cannot tell Tim Cook how to act as a mature CEO, who to have dinner or lunch with, or whether spending most of his time as CEO slavishly defending iPhone's screen size is appropriate or not. But seriously, what is he thinking? Having dinner and courting a guy like Icahn.

Does he even have any clue about Wall Street and Icahn?

Just look at Dell if Cook is clueless and wants to have a preview of what Apple would be like having someone like Icahn on board in a couple of years time.

I'm going to go out on a limb here...I think Cook knows more about Icahn than you or anyone else here. Cook is no dummy and I'll give him the benefit of a doubt that he knows what he's doing. Being a public company has its drawbacks, situation like these where a billionaire decides to invest heavily giving him a voice is just one example.

 

[fpsBeaTt]

Ha, you're right.
What I understand was some rich dude got $150 billion to buy apple stock,
and that's it..

Are you for real?

 

[GfPQqmcRKUvP]

If you are the stock market expert you want us to believe you are, you would calmly explain your opinion to that poster, and to most of us, who are less knowledgeable about these affairs, rather than resort to condescending rebuttals.

I already did. In this thread. I won't repeat it.

I suspect this is the opinion of most of us 'uninformed, misguided souls'. But of course "we don't get it".

You don't. This is a complete non-issue to anyone who has any bit of market knowledge.

 

[juanmanas]

How is it material information? They had dinner and Icahn suggested a larger buyback. Now if Cook made some promises to Icahn about what he (or the board) intends to do that is not public information, AND then Icahn makes a trade in AAPL based on that non public information, then you have something. Otherwise, the SEC has better things to investigate.

Giantfan, in financial law, it doesn't work like that. Instead:

a) Material information: the information that one would like to have before making an investment decision or also defined as the type of information that could cause a shock to the market.
b) Non public: the firm, according to law, has to disseminate all the information to all stakeholders at the same time.

In law, acting through the access of non public and material information is an offence. Icahn should have:

a) Waited for Apple to disseminate the info publicly if its true they are planning a buyback.
b) Not to act on the basis of non public info (here, i don't know if he has acted..)

I hope this helps.

----------

In the US the SEC has established a protocol for using social media. As long as you inform people in a public notice that you will use a social media site like Twitter to disseminate information, it's perfectly fine to do so. It's no different from giving a press interview to announce your plans.

Also note that it isn't Apple who is actually tweeting information. It's fine for any shareholder to meet with a CEO and disclose what he asked the CEO to do. The CEO can't approve a buyback by himself. Only the Board can do that. If they do, they will have to tell everyone at the same time.

KPOM,

I disagree. The SEC considers it an offence to disseminate material non public information.

----------

And, since company owned stock is not voting stock, it also increases the power of a large stock holder like Ichan.

I don't think he is interested in voting rights, but cap appreciation. Disseminating a rumor like this made the shares go up... and a stock buyback of that size could increase the share value by 20-30%. Not bad.

 

[macgabe]

Bottom line, not much difference in terms of tax liability, unless you are able to time your capital gains for best tax advantage purposes (offsetting loses, mainly). The big difference is dividends are guaranteed and capital gains are not.

Personally I automatically pay 30% on all dividends and 0% on all capital gains. I have no choice. So a big difference there. It really depends on your tax situation. Given that most of Apple stock will be owned by institutions probably, there are likely big differences in how much tax is paid by others too. But you're right that divs are guaranteed (real money) and the effect of buybacks is unpredictable.

 

[macgabe]

I disagree. The SEC considers it an offence to disseminate material non public information..

I agree that Icahn is treading a very fine line here. And he knows it. Which is why he quickly mumbled something about not wanting to know privileged information when he was questioned by Wapner on CNBC yesterday about what other uses Apple might have for the cash.

Not only is Icahn trying to juice the stock with his insider tweets. But if Cook falls into the trap of giving info to Icahn, it could lead to an insider trading charge.

In order to successfully rebuff Icahn, there will be pressure on the board to disclose why they don't want to use the cash, including maybe hints at "big plans" or acquisitions, which will be insider information.

Consider also that Icahn has built a big stake in Nuance (Siri), which he has just gone hostile ("activist") on, http://www.cnbc.com/id/101002695; it is not unlikely that he will try to get Apple to buy it after he has gained control of the board. For all I know his lawyers have worked out that by tweeting his intentions before they are realised he can somehow get round an insider trading charge.

Whatever the case, I think we can rest assured that he will game the system any way possible, in order to make more money for himself.

 

[macgabe]

I largely agree with you, but would like to quibble a bit.
Apple does not spend "tens of billions on their own R&D". Maybe this ramps up in the future, but they are still solidly in the single digits. I believe they went from 1.5 Billion to 3 billion, then to 4 billion. But they aren't going to get to spending tens of billions anytime soon and most likely ever.

You make some good points and I was pretty much pulling those figures out of the air (I didn't mention a time period!), but loosely basing them on this article I had read on Asymco, http://www.asymco.com/2013/04/04/the-cost-of-building-galaxies-and-iphones/:

"In 2012 Samsung spent around $20 billion while Apple spent about $10 billion (excluding leasehold improvements or Apple stores but including real estate)."

Also, bear in mind that Apple has already promised to return $100b to shareholders by Apr 2015 http://www.apple.com/pr/library/2013/04/23Apple-More-than-Doubles-Capital-Return-Program.html , which by my calculations is pretty much all its cash currently on book after a reduction for future tax liabilities.

But that is not enough for Icahn, he wants it all and he wants it now!

Here's a black swan event where $50b might come in handy. What if there was a catastrophic seismic event in California, similar say to the tsunami in Japan. Say Apple's production was crippled for two years (like Marvell in Thailand after the floods a couple of years ago, or Canon in Japan after the tsunami), maybe personnel affected, Californian economy takes a big hit, US economy takes a hit, iPhone sales drop sharply, stock hits $200/share. Meanwhile Samsung, Xiaomi and Lenovo are doing just fine. That would be a great time to buy shares back and have enough money to rebuild operations as quickly as possible and donate money to local causes.

I'm not saying now is not a good time to buy shares (quite the opposite, I'm a buyer), and their last bond issuance was a very well-timed move. But $100b is already an enormous return of capital, and frankly Icahn gives me the creeps.

Here's another scenario which is even more likely. What if 10y rates, against all expectations, actually start to head back down and this 5 year bull market morphs into a 2 year bear market? Then you will have borrowed money above par, your stock will still not go up because of the weak market, and you won't have a war chest at the bottom of the market when it is most useful.

 

[69650]

Tax reasons. If you pay a dividend, then all shareholders get paid and recognize that as taxable income. If you do a buyback only shareholders who sell (a voluntary action) will recognize a gain (or loss) depending on their gain and loss on that sale. The shareholders selling for cash might very well be offsetting their gains against loss in other stocks. Or they might be folks who bought in at $700 last year and they are taking their loss now for a write off. This is the main tax advantage.

There used to be a big difference though between how the income from dividends and capital gains on the stock were taxed. Now sometimes dividends are taxed as ordinary income, which is much higher than the capital gains tax. Most folks though would receive the dividend as qualified dividend which is taxed at the same low capital gains tax. So there isn't much difference here now.

Based on recent experience if Apple did another buyback the shares would go up quickly as Apple are buying the shares but then once they stopped they would just come back down again over time. That's what happened last time. So in the end if you want to make that profit or minimise your previous loss then you have to sell which means you could end up with a bill for capital gains tax anyway.

I still think it's better for Apple to invest that cash in order to grow the business. They could for example acquire someone like Adobe which would immediately add to their bottom line and significantly add to the software portfolio.

The reason the shares are stagnant is because the stock market is worried that Apple is turning into a one-product company. The iPhone accounts for about 50% of revenues and profits. That is a very dangerous position to be in. If anything happened to the iPhone business and sales starting falling Apple would be in trouble.

Investing rather than buying back would still increase the share price over time but that increase would be more sustainable as it helps to even out Apple's business amongst more products.

As a shareholder I would rather see my Apple shares gradually appreciate over time rather than going up and down like a yoyo like they're doing now which is exactly what would happen with a buyback.

 

[Risco]

Why would they use their entire cash reserves to initiate a buy back? It seems to me he wants to break Apple.

 

[TallManNY]

More to the point IMO is that spending even a dollar of reserves to cover cash flows means the company has gone from being profitable to unprofitable. Apart from what that means to a stockholder (a fire sale price) is the question of what well-run company would hold large quantities cash against such an eventuality. The answer is, none. Would it inspire the confidence of investors if they did?

In his day Steve Jobs never had a good explanation for why Apple needed to stockpile more and more cash. His answer when asked was basically "talk to the hand." Savvy investors began to wonder what it was all about. Does the company (1) lack confidence in the future, or are they (2) planning some acquisition larger than anything known to history? Both explanations are matters of concern to investors and the concerns grow along with the cash horde. Tim Cook seems to understand the bad messaging that comes along with cash hoarding. Steve, for all his other merits, apparently never did.

I think with Steve it was understandable because of his ego and his interest in control. I always though the cash horde under him was a statement that he thought he might come up with a better reason to spend it, so it is better off being under his control.

Also it wasn't as large under him. I suspect he would approved of everything done so far (which hasn't been enough to stop the pile from growing) versus the alternative of the cash pile approaching $200B and heading in the very foreseeable future to $300B (a new iPhone may one day not sell at a large margin, but it certainly isn't going to be the iPhone 5S).

 

[TallManNY]

You make some good points and I was pretty much pulling those figures out of the air (I didn't mention a time period!), but loosely basing them on this article I had read on Asymco, http://www.asymco.com/2013/04/04/the-cost-of-building-galaxies-and-iphones/:

"In 2012 Samsung spent around $20 billion while Apple spent about $10 billion (excluding leasehold improvements or Apple stores but including real estate)."

Also, bear in mind that Apple has already promised to return $100b to shareholders by Apr 2015 http://www.apple.com/pr/library/2013/04/23Apple-More-than-Doubles-Capital-Return-Program.html , which by my calculations is pretty much all its cash currently on book after a reduction for future tax liabilities.

But that is not enough for Icahn, he wants it all and he wants it now!

Here's a black swan event where $50b might come in handy. What if there was a catastrophic seismic event in California, similar say to the tsunami in Japan. Say Apple's production was crippled for two years (like Marvell in Thailand after the floods a couple of years ago, or Canon in Japan after the tsunami), maybe personnel affected, Californian economy takes a big hit, US economy takes a hit, iPhone sales drop sharply, stock hits $200/share. Meanwhile Samsung, Xiaomi and Lenovo are doing just fine. That would be a great time to buy shares back and have enough money to rebuild operations as quickly as possible and donate money to local causes.

I'm not saying now is not a good time to buy shares (quite the opposite, I'm a buyer), and their last bond issuance was a very well-timed move. But $100b is already an enormous return of capital, and frankly Icahn gives me the creeps.

Here's another scenario which is even more likely. What if 10y rates, against all expectations, actually start to head back down and this 5 year bull market morphs into a 2 year bear market? Then you will have borrowed money above par, your stock will still not go up because of the weak market, and you won't have a war chest at the bottom of the market when it is most useful.

That is quite a blackswan event. Basically, yes, if the stock were to drop sharply then it is better to do buy back at that time then now. But basically you are suggesting that Apple have as part of its business line a stock predicting department. It isn't their core competency. Same thing with an interest rate play. But really since Apple issued $19B of debt recently at about 2% and could easily do a huge deal at 3%, there is no way for interest rates to drop meaningfully lower.

As for the earthquake, I don't think a mammoth earthquake in California would have much effect on Apple unless, somehow, the Apple buildings are particularly earthquake susceptible and lots of engineers die. Almost all of the manufacturing is in China and so that would be unaffected. Apple's servers are in North Carolina and other places and they are being built with redundancy and for future needs (probably some sort of video service that is much higher scale than current iTunes offerings). So even losing one of the massive server buildings (which are almost assuredly not built anywhere near a fault line) would not slow things down. An earthquake in China would be unlikely to effect the entire supply chain (China is big). If it did though, then the supple of iPhones would decrease but what was made would obviously sell at a nice profit. Apple still remains cash flow positive as expenses building phones decrease.

Agree, Icahn is creepy. But even creepy people can be right, especially in their areas of expertise.

As for the impact of the promised $100B cash to shareholder plan, your calculations are actually wrong. First of all, we are already well into the first year of this three year plan and the cash pile has increased every quarter (though perhaps not net when you consider the $19B debt issuance, I don't know). I suspect that when results come out at the end of this month the cash pile will be larger. Second, you are not assuming continued heavy profits. That is beyond just being cautious, that is being illogical. There is no reason to think the smartphone market won't continue to be very large (smartphones are useful and historical trends show this market growing). There is no reason to think Apple won't get a large chunk of that market (see recent record launch sales for iPhone 5S or even look at prior quarters sales of older iPhones competing with Samsung's flagship S4). So it is logical to assume that huge profits are still on the near horizon. I personally believe that if there is $70B left of the slated $100B cash distribution that this will not be enough to use up the next 2.25 year's worth of cash flow. In other words, if Apple sticks with this $100B plan it will end 2015 with more cash on hand than it has now.

Let's revisit when the quarter reports come out. If the cash pile has grown and Apple projects a robust quarter to come, then further cash outlays will make more sense.

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Based on recent experience if Apple did another buyback the shares would go up quickly as Apple are buying the shares but then once they stopped they would just come back down again over time. That's what happened last time. So in the end if you want to make that profit or minimise your previous loss then you have to sell which means you could end up with a bill for capital gains tax anyway.

I still think it's better for Apple to invest that cash in order to grow the business. They could for example acquire someone like Adobe which would immediately add to their bottom line and significantly add to the software portfolio.

The reason the shares are stagnant is because the stock market is worried that Apple is turning into a one-product company. The iPhone accounts for about 50% of revenues and profits. That is a very dangerous position to be in. If anything happened to the iPhone business and sales starting falling Apple would be in trouble.

Investing rather than buying back would still increase the share price over time but that increase would be more sustainable as it helps to even out Apple's business amongst more products.

As a shareholder I would rather see my Apple shares gradually appreciate over time rather than going up and down like a yoyo like they're doing now which is exactly what would happen with a buyback.

I agree that the shares are stagnant because the Iphone is a majority of Apple's business and has been for years now. And folks worry that cheap androids and subsidized windows phones are going to eat Apple's lunch. But buying unrelated businesses doesn't really help unless Apple can integrate that business in a way to add value. Shareholders who like Adobe can currently own Apple and Adobe shares. If would be even easier for those shareholders to do that if apple returned more cash to them. Having Apple do that step for them by buying Adobe doesn't really help the shareholders unless there is some form of integration between the company. The vaunted "synergies" that justify so many M&A deals. But integration of a large company means you morph or corrupt some of the apple culture. I don't think shareholders want that.

By the way, you can't look at recent buybacks and share price moves and say for sure the cause and effect. Lots of things impact Apple's shares much more than the relatively small buybacks that have happened. All you can say for certain is that the buybacks result in the remaining shareholders having a greater percentage of the company per share. This is the reverse dilution that is getting achieved.

 

[giantfan1224]

Giantfan, in financial law, it doesn't work like that. Instead:

a) Material information: the information that one would like to have before making an investment decision or also defined as the type of information that could cause a shock to the market.
b) Non public: the firm, according to law, has to disseminate all the information to all stakeholders at the same time.

In law, acting through the access of non public and material information is an offence. Icahn should have:

a) Waited for Apple to disseminate the info publicly if its true they are planning a buyback.
b) Not to act on the basis of non public info (here, i don't know if he has acted..)

I hope this helps.

You're saying all this as if I don't understand. How did he disseminate material information? He said he had dinner with Cook, pushed hard for a $150B buyback, and that they would meet again in a few weeks. That's not material. Cook agreed to nothing, at least based on what Icahn said. This information from Icahn is all over the financial news world. If the information Icahn gave is so "material", an investigation would've begun the minute he said it. There's no hiding from this. And Icahn's not that stupid.

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Based on recent experience if Apple did another buyback the shares would go up quickly as Apple are buying the shares but then once they stopped they would just come back down again over time. That's what happened last time. So in the end if you want to make that profit or minimise your previous loss then you have to sell which means you could end up with a bill for capital gains tax anyway.

The bolded portion of your comment makes no sense. The price will go down just because? Or just because it did before? You're not basing it on anything material. The fact about a share buyback is it increases the EPS, which decreases the P/E, trailing and future, among a slew of other multiples that investors use to determine the value of a stock. So if earnings at least stay constant, or grow over time--as it's been doing--why necessarily would the stock price "come back down again over time"?