Fourth generation Apple iPads, which went on sale on Tuesday, are seen on display at an Apple store on February 5, 2013 in San Francisco, California. Greenlight Capital has filed suit against Apple Inc in federal court in New York, saying the company needs to do more to unlock value for shareholders.
Reuters/New York/San Fransisco
Apple has confronted its first major challenge from an activist shareholder in years as hedge fund manager David Einhorn’s Greenlight Capital filed suit against the company and demanded it dole out a bigger piece of its $137bn cash pile to investors.
The unusual move comes as the world’s largest technology company grapples with a tumbling share price, mounting competition in the smartphone and tablet markets and concerns about its ability to produce new breakthrough products.
Einhorn, a well-known short-seller and Apple gadget fan, said in an interview with CNBC that the company harbored a “Depression-era” mentality that led it to hoard cash and invest only in the safest, lowest-yielding securities.
Apple nearly went broke in the 1990s before Steve Jobs returned and engineered a sensational turnaround, with products such as the iPhone and iPad that became must-haves for consumers around the world. The company’s near-death experience has led Apple to be exceptionally conservative with its cash.
Last March, just months after Jobs’ death, Apple responded to a barrage of investor criticism over its large cash hoard by initiating a quarterly cash dividend and a share buyback that would pay out $45bn over three years. At the time, Apple was sitting on $98bn in cash.
Einhorn’s lawsuit filed in US District Court in Manhattan targets a proposal by Apple to eliminate from its charter “blank check” preferred stock. The board now has discretion to issue preferred stock but is asking shareholders at its annual meeting on February 27 to vote on a proposal that would first require shareholder approval.
Einhorn urged Apple shareholders to vote against the plan, and put forward his own proposal for an issuance of preferred stock — which he deems superior to dividends or share buybacks — with a perpetual 4% dividend.
Analysts have expected stockholder pressure to increase as Apple’s share price declines and its outlook grows murkier. Stock in the company that once seemingly could do no wrong has fallen 35% since its September record high through on Wednesday. It ended Thursday 3% higher at $468.22.
Einhorn, often cited as one of the most committed Apple bulls, remains long on its shares. But the fund manager, whose Greenlight had a sub-par year in large part because of Apple’s late-2012 stock swoon, said the company needs to fix its “cash problem.”
“It has sort of a mentality of a depression. In other words, people who have gone through traumas ... and Apple has gone through a couple of traumas in its history, they sometimes feel like they can never have enough cash,” Einhorn said on CNBC.
Some investors, who have long railed against what they saw as Apple’s ultra-conservative attitude toward its cash, rallied around the principle of returning cash to shareholders.
In an interview with Reuters, Einhorn said he had gone to Apple CEO Tim Cook in recent weeks after the company’s chief financial officer, Peter Oppenheimer, brushed off his entreaties in September. Cook, who is rarely known to engage investors in exclusive conversations, was unaware of the earlier conversations with Oppenheimer, according to Einhorn.
“When I discussed this with Tim Cook, and actually, the conversation has been going on for the last couple of weeks, he said that he wasn’t familiar with my previous conversations with Peter Oppenheimer and whoever Peter Oppenheimer’s advisers were. I was surprised by that,” Einhorn told Reuters.
But Apple fired back on Thursday afternoon, saying Einhorn’s lawsuit over the shareholder proposal was misguided and that striking the “blank check” provision from its charter would not preclude preferred share issuances in future.
“Contrary to Greenlight’s statements, adoption of Proposal No 2 would not prevent the issuance of preferred stock,” it said in a statement. “Currently, Apple’s articles of incorp provide for the issuance of ‘blank check’ preferred stock by the Board of Directors without shareholder approval. If Proposal No 2 is adopted, our shareholders would have the right to approve the issuance of preferred stock.”
A source familiar with the discussions Apple was having with Einhorn said that talks with Einhorn as recently as this week had been cordial, that there had been friendly disagreement only on whether common shareholders should be allowed to vote on something as significant as an issuance of preferred stock.
But the source added that Apple, while willing to consider investors’ point of view, will eventually decide in the best interest of all shareholders.
Oral arguments between Apple and Einhorn have been set for February 22 in US District Court for the Southern District of New York. Apple has until February 15 to respond to Greenlight’s suit, after which Einhorn has until February 18 to reply.
“We saw that the proxy came out and we saw they were planning to get rid of preferred and then, we said, ‘Wait a minute, we are not going to be able to bring this up again in a good way if we allow them to do this. So we should contest it now,’” Einhorn said in the interview.
Einhorn’s actions go well beyond increasingly common shareholder calls for Apple to increase its dividend or buy back shares. Einhorn argues preferred stock — which functions like a bond in that it pays a fixed dividend over time — is a better route because the company won’t have to use cash right away.
Analysts say another benefit is up to 80% of the dividends from preferred stock can be tax-free for corporate investors and it is not logged as debt on the balance sheet. But the tactic is generally pursued by low-growth companies, where capital gains are less assured.
“The idea is powerful, and when I have a chance to explain it to the shareholders, most will see it as an enormous win-win,” Einhorn told Reuters.
Calling Apple shares “utterly misvalued” at current levels in the CNBC interview, Einhorn said the company no longer needs to grow at the near triple-digit rates of the past.
For every $50bn in preferred stock that Apple gives away to shareholders, it could unlock $32 a share in value for investors, Einhorn said, without explaining his rationale.
“We understand that many of our fellow shareholders share our frustration with Apple’s capital allocation policies,” Greenlight said in an open letter to investors. “Apple has $145 per share of cash on its balance sheet. As a shareholder, this is your money.”
Einhorn said he suggested to Apple an initial preferred share distribution, in which dividends could be funded on an ongoing basis by a relatively small percentage of the company’s operating cash flow.
“Apple rejected the idea outright in September 2012,” he said, and then refused to withdraw the proposal to eliminate preferred stock from its charter.
