Yesterday was a big day for anyone interested in Apple’s shares. There was some AAPL action after billionaire hedge fund manager David Einhorn of Greenlight Capital issued a press release stating that his company had filed a lawsuit against Apple, targeting a proposal by Apple to eliminate preferred stock from its charter.
In reaction Apple issued a statement saying that Apple has been in “active discussions about returning additional cash to shareholders,” and that the company would “thoroughly evaluate Greenlight Capital’s current proposal”.
Einhorn’s suit is being descried as the biggest investor challenge in years.
Goldman Sachs believes that this example of shareholder activism highlights Apple’s significant capabilities for increased capital allocation, writes Valuewalk.
What does Greenlight want?
Einhorn, who controls more than a million AAPL shares, is demanding that the company gives more of its $137 billion cash pile to investors. He isn’t the only one, last week we wrote that Gamco Investors portfolio manager Larry Haverty (who owns Apple shares) has suggested that Apple investors may sue the company if it continues to refrain from returning more cash to shareholders.
Einhorn’s company, Greenlight Capital – an AAPL shareholder since 2010 – issued a statement in which it urges Apple shareholders to oppose an Apple proposal that could impede Apple’s ability to unlock shareholder value.
Greenlight alleges that Apple is trying to eliminate preferred stock from Apple’s charter as part of “Proposal 2”. Apple shareholders will be able to vote on this proposal at the annual shareholder meeting on 27 February. Einhorn is urging shareholders to vote against the proposal.
The statement revealed that Greenlight and Apple have been in discussions since May 2012 about ways to unlock value for shareholders, but Apple rejected Greenlight’s idea outright in September 2012.
Einhorn wants Apple to issue a new class of preferred stock that will pay a 4% dividend in perpetuity. This special dividend will go beyond the $2.65 a share Apple is already paying, in the form of a so-called “perpetual preferred stock.”
He believes that by issuing this stock, Apple would immediately create hundreds of billions of dollars of new wealth for Apple shareholders, by “unlocking” the value of the cash on Apple’s balance sheet.
Greenlight’s statement explains: “Assuming Apple retains its price to earnings multiple of 10x and the preferred stock yields 4%, our calculations show that every $50 billion of perpetual preferred stock that Apple distributes would unlock about $30 billion, or $32 per share in value. Greenlight believes that Apple has the capacity to ultimately distribute several hundred billion dollars of preferred, which would unlock hundreds of dollars of value per share”.
Greenlight believes that such a move would be good for shareholders in the light of “the recent, severe under-performance of Apple’s shares, which are down approximately 35% from their peak valuation, underscores the need for the Company to apply the same level of creativity used to develop revolutionary technology for its consumers to unlock the value of its strong balance sheet for its shareholders.”
Greenlight also believes the market will appreciate a more “shareholder friendly capital allocation policy”.
Einhorn’s premise is that investors are not assigning the proper value to the $137 billion of cash on Apple’s balance sheet, notes Business Insider.
In a separate report Business Insider writes: “Einhorn’s plan does not actually create any new value for Apple or Apple shareholders. It’s just financial engineering.”
Apple responds to Greenlight
Apple issued a statement of its own in response to Greenlight’s claims.
Apple went so far as to mention Greenlight in the statement, saying: “Apple’s management team and Board of Directors have been in active discussions about returning additional cash to shareholders. As part of our review, we will thoroughly evaluate Greenlight Capital’s current proposal to issue some form of preferred stock. We welcome Greenlight’s views and the views of all of our shareholders.”
Crucially, Apple claims: “Contrary to Greenlight’s statements, adoption of Proposal #2 would not prevent the issuance of preferred stock.”
The company explains that the proposal would only prohibit the issuance of such stock without a vote by shareholders.
Following the statement from Apple, the stock soared. Jumping from about $455 to $470 in just 20 minutes. This was the highest point for AAPL since the company reported its first quarter earnings on 23 January.
Apple shareholders will be free to vote with their feet on 27 February.
What could go wrong?
Business Insider is cautious. They write that: “If the market is behaving even remotely rationally, the market should therefore respond by knocking the value of Apple’s common stock down by about $50 billion.
In other words, if Apple issued $50 billion of this new class of preferred stock tonight, the price of Apple’s common stock should open tomorrow at about $400 a share.”
Their reasoning is that “No matter how good a financial engineer you are, you can’t just wave your magic wand and make something out of nothing.
The report suggests that by issuing preferred stock Apple would “befuddle mom and pop investors who won’t take the time to understand that they now have a claim to less of Apple’s assets than they did before”.
Instead of issuing new preferred stock, Apple should just significantly increase its regular dividend, says Business Insider.
Business Insider thinks this is a better idea because it “doesn’t actually require them to use any of the cash right away. They would be able to maintain their cash chest and all of the strategic ideas and at the same time shareholders would be rewarded with something that gives them credit for Apple’s phenomenal balance sheet and franchise value.”
Apple’s statement in full
We find ourselves in the fortunate position of continuing to generate large amounts of cash, including $23 billion in cash flow from operations in the last quarter alone.
Apple’s management team and Board of Directors have been in active discussions about returning additional cash to shareholders. As part of our review, we will thoroughly evaluate Greenlight Capital’s current proposal to issue some form of preferred stock. We welcome Greenlight’s views and the views of all of our shareholders.
As a part of our efforts to further enhance corporate governance and serve our shareholders’ best interests, Proposal #2 in our proxy includes some recommended changes to our articles of incorporation. These changes were recommended independently of Greenlight’s proposal and would not preclude Apple from adopting their concept. Contrary to Greenlight’s statements, adoption of Proposal #2 would not prevent the issuance of preferred stock. Currently, Apple’s articles of incorporation provide for the issuance of “blank check” preferred stock by the Board of Directors without shareholder approval. If Proposal #2 is adopted, our shareholders would have the right to approve the issuance of preferred stock. As such, Proposal #2 has the support of many of our shareholders.
We remain committed to having an ongoing dialogue with our shareholders to get perspectives around return of capital and driving shareholder value.
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Author: Karen Haslam, Editor
Macworld editor since 2008, Karen has worked on both sides of the Apple divide, clocking up a number of years at Apple's PR agency prior to joining Macworld two decades ago.
Karen's career highlights include interviewing Apple's Steve Wozniak and discussing Steve Jobs’ legacy on the BBC. Her focus is Mac, but she lives and breathes Apple.