Why Carl Icahn won't leave Apple alone

Last week CNBC ran a story about billionaire investor Carl Icahn having a “good conversation” with Tim Cook. Icahn says they both agree that Apple stock is undervalued, and that Apple is still studying Icahn’s proposal for a $150 billion stock buyback. Icahn has made it pretty clear to Cook that he isn’t going away. So, why is that exactly?

If a company has a lot of extra cash on hand, and if interest rates are very low (like now), the cash does nothing to help earnings. So it can make sense to buy back your own stock, to reduce the share count, which boosts earnings per share. Pretend interest rates were zero. If you could buy back 20% of your stock you’d boost earnings per share by 25% because you’d divide the same corporate profitability by 80% of the original share count. The math makes sense. If Apple did a huge buyback it probably would boost the share price.

But Icahn wants Apple to take on about $150 billion of debt to do a buyback. With interest rates being as low as they are, the debt is cheap, and so there would still be a huge effect on earnings per share. It would almost certainly boost the share price of Apple. But it would also add a lot of risk, and as a long term investor I do not think Icahn’s interests are aligned with my own. I don’t support his proposal. It’s way too aggressive. You may argue that Apple is massively profitable and could pay back the debt in a few years. Sure, that may be true. But what if something changes that? What if Android really does cause major pain to iPhone margins, affecting profitability? Do I want Apple saddled with a crazy level of debt in that case? No way.

I would rather see Apple use future cash flow to buy back stock or raise the dividend rather than go into massive debt to do it all today. Or maybe execute cash borrowings representing one year of forward domestic earnings, and do that every year for the next few years. It’s much safer, and it results in almost the same benefit to a long term shareholder, provided the stock doesn’t suddenly spike higher.

Carl Icahn may not be going away. But he controls only 0.4% of the stock. He doesn’t speak for everyone.

Those of you paying attention to Apple the stock, what do you think of Carl Icahn’s proposal?