Why Carl Icahn won't leave Apple alone

Why Carl Icahn is stalking AAPL stock

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?

Chris Umiastowski

Chris was a sell side financial analyst covering the tech sector for over 10 years. He left the industry to enjoy a change in lifestyle as an entrepreneur, consultant, and technology writer.

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There are 12 comments. Add yours.

Becjr says:

Unfortunately, I don't have any shares of Apple stock. Having said that, I do strongly agree with you that prudent , long term planning is preferential to a quick risk gain, especially when in monetary amounts as high as stated.
My question is how Mr Icahn seems to have so much influence [ in this case] if he holds so little leverage? What am I missing? Is it just media spinning?

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sir17reeder says:

I don't really get how sticks work but I think it's kind of odd that he talked with Tim Cook prior to making this decision. I don't know if this would happen but he might have gotten insight on future apple plans and decided to take the risk on the basis. Rumors of new product categories and etc. could mean something. But then what do I know I don't hardly even understand stock.

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mulasien says:

Icahn essentially wants a short term profit even if it hurts Apple in the long run financially. It would be stupid business wise to go into that much debt to make a few investors happy with a quick profit. Icahn is among the worst of the sleazeballs in this matter.

Ipheuria says:

As a billionaire I think there are very few shareholders that Icahn speaks for. Whether the move creates pains for Apple later doesn't affect Icahn greatly because he is already a billionaire. So whatever Apple chooses to do I hope they do it without going into debt. As a company that was brought back from the brink I think they have more sense than putting themselves at risk that way. I've got shares so I've got a vote anyway, as small as it may be lol.

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Solamar says:

Icahn is after instant gratification. He's only been in Apple for a short time. His interests do not reflect stockholder interests in any way, much less company survivability. If he could gut the company of money and benefit from everyone else's losses, I think he would. A lot of jobs depend on Apple, a huge amount of federal income tax comes from Apple.

He would loose a proxy fight, hands down.. He's not in a position to force it, he knows it. Thats why he's going the social media route.. trying to drum up support and manipulate stock price.. Sad he can have that kind of power.

Just Me3 says:

Why? I imagine he will be looking for a huge payoff from Apple/Cook to go away - ala Ross Perot and GM back in the day.

mike5 says:

People have to know who Carl Icahn is--he is an old school corporate raider. In mid 80's, he took over TWA and systematically sold off assets, all the while not properly funding their pensions. He has gotten CEOs ousted, he has influenced mergers, he forces his way onto BODs and he does it w/brute force. Generally, his interests do not coincide w/the long term plan of the company, but he has such influence--I guarantee you, NO company is happy to hear that Carl Icahn has become a major shareholder in their company. Don't think .3% of the stock is small. Not only does he have tons more $$$, but he has access to much, much more. He has been heavily involved w/TWA, RJR Nabisco, USX, Revlon, Time Warner, etc. He looks for actions that generally turn a short term profit and stock buy backs do just that. Just today, YUM announced a measly $750M buyback and their stock jumped 4.5% on the news. A $150B buyout is HUGE. A difference, YUM is doing their buyback voluntarily and on their terms. Delta Airlines also announced a buyback recently, but so much smaller and over a 5 year period. If AAPL does anything remotely similar to what Icahn is suggesting, the stock will go up short term, but long term...unlike YUM and DAL, AAPL ALSO needs to spend significant $$$ on R&D. A buyback may be warranted, but be very careful when it is Carl Icahn making the demands and trying to drive the direction of the company.

Dev from tipb says:

For Apple, the company, stocks are a means to an end. For Icahn, the investor, the stock (and the stock price) is an end in and of itself. Those interests are not always aligned, and do not seem to be here.

Apple's board should ask Icahn one question only -- how will specifically will a concentration of ownership (essentially, what a stock buyback is) help the future running of Apple, Inc.? The only possible argument is that it might increase the overall value of the company and therefore the cash Apple can tap to fund future operations, but, if anything, Apple has the opposite problem -- a lack of vision/ability to capitalize on the hoard they already have on hand. A stock price, a buyback, or, really, any fiscal maneuvering that just serves to increase the stock price is not going to help Apple the corporation one iota. Actually taking on debt to do so would be foolish.

jfcoughlan says:

Carl Icahn is only interested in making money. To be clear, there is nothing wrong with that, that is after all why people invest in companies. However, Icahn wants Apple to use all of its available cash in the most insane way so that Icahn can get a huge return in a very short time. He's advice will hurt the company in the long term and does nothing in the short term other than bump the stock price in an artificial way. Once the stock jumps Icahn will sell, spend the rest of his live counting the billion he made and never again think about Apple or the future of the company. Icahn sees Apples cash and is trying to steal it in a legal way. Fortunately Apple and Wall Street know Icahn is a crook and don't seem to care when he speaks.

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zdn1042 says:

From the looks of most of the comments posted, Carl Icahn is just in it for himself and not really thinking for the good of the company as a whole. Did a quick wiki and found Icahn is quite the aggressive businessman. He really is into making huge business moves. Not really worried as I know Apple isn't easily intimidated and will make the best decision for their own good.

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hoobie1928 says:

A billionaire wanting to make a quick $100million. This type of greed is what causes the market to drop and hurt peoples Mutual funds and 401ks. Be happy you are a billionaire! A person couldn't spend that much money in a lifetime, why do you need more?

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Good OL MC says:

I try to put myself in the shoes of the people running and working for large corporations when having to deal with investors in a one on one scenario. I can only imagine how frustrating it can sometimes be to have people, who have every right to, telling you to do things that can run directly contrary to the long term interests of the company and the employees it has in the effort to increase their own profit.

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