updated 01:43 am EST, Fri February 22, 2013
Motive still appears to be greed over company good
Greenlight Capital CEO David Einhorn, who is currently suing Apple to prevent the company from proposing a stock-authorization scheme before its own stockholders for a vote next week, took his case directly to investors in an unusual hour-long conference call. Einhorn, who believes Apple should disperse its large -- and growing -- cash reserves to investors much faster than it is currently doing, dismissed the idea of Apple needing large reserves to ride out economic downturns or fund innovation, and instead pushed a preferred-stock plan he now calls "iPrefs."
Greenlight is trying to persuade investors of the value of its plan for non-voting but higher-dividend "preferred stock" in case the lawsuit is unsuccessful at stopping a vote on the matter at the company's annual shareholders meeting, set for February 27. Apple has offered a proposal to amend the company's original charter on the matter of issuing such preferred shares -- which it has very rarely done -- so that a shareholder vote of approval is required before any further preferred shares could be offered. Currently, the Board of Directors can grant preferred shares entirely at its own will.
Einhorn's lawsuit makes the technical argument that Apple's proposal (as worded) may violate SEC rules about "bundling" multiple proposals into one. Apple told the court that the SEC had already reviewed its filing on the matter and had no objection. The lawsuit calls for Apple to be barred from bringing the matter up for a vote, keeping the charter as it is presently. He has told the press and investors that Apple's Proposition #2 would lead to the company never issuing preferred shares, even though Apple CEO Tim Cook and others have said that this is completely incorrect.
Einhorn's scheme calls for Apple to spend $47 billion to create a preferred stock with an annual dividend of $2 (or 50 cents per quarter), which it would pay in perpetuity. He said he believes it would make the stock more attractive to investors, even though it would deplete almost $2 billion per year ongoing. Earnings per share estimates would be adjusted to account for the payout obligation. Einhorn said he believes the iPref stock could yield four percent and trade at an 80-basis-point spread compared to 30-year Treasury notes.
The CEO makes a point that his scheme could return up to some $150 per share to investors, compared to a roughly equal one-time dividend or stock buyback plan on the same scale, which would only return $89 due to taxes on the gains, since under those scenarios Apple would have to "repatriate" earnings it currently keeps overseas in order to avoid some US tax liability. Thus far, larger AAPL shareholders have mostly sided with Apple's proposal to let shareholders pre-approve any preferred stock issuance.
The conference call by Einhorn failed to shed any light, however, on how the depletion of the cash reserves to investors would benefit Apple itself. When Apple began piling up cash faster than it could spend it a decade ago, CEO Steve Jobs offered a number of reasons for the hoarding (and at the time, Apple paid no dividend at all) -- including protection from takeovers, funding research and development (which has paid off handsomely for the company), and being able to keep funding levels stable during periods of economic crisis.
However, in Jobs' final years and following his death, there has been increasing pressure from investors who feel that Apple's cash -- now over $137 billion -- is far more than is needed for those reasons, a point current CEO Tim Cook has agreed with. Earlier this year, Apple began a $10 billion stock buyback program to cover the next three years, and began issuing a dividend again. However, the company's popularity with consumers means that it continues to add to its coffers faster than it plans to distribute a total of $45 billion.
Apple has filed a scathing response to the lawsuit in court, saying that Einhorn is making his proposal more for his company's own financial gain rather than genuine concern for stockholders, with Cook referring to Einhorn's lawsuit as a "silly sideshow.' Looking at Wall Street history, however, making stronger efforts to disperse excess cash to shareholders hasn't traditionally helped the stock price or the company in any easily-identifiable way. Microsoft, for example, has issued preferred stock, paid regular dividends and bought back stock -- only to see its stock price stagnate for over a decade now.
The move may pit long-term investors who have reaped enormous wealth out of AAPL's most-rising price over the years -- even with the recent prolonged dip, the stock gained more than 30 percent in value in 2012 -- against short-term, more yield-focused investors who want steady, guaranteed returns and maximum payouts on their investments. The judge in the lawsuit has already expressed skepticism -- even as he agreed that Greenlight might prevail on its technical merits -- that any "irreparable harm" would be done by allowing the shareholder vote to take place.