Einhorn to Apple: Time to Pay the Piper
Feb 22, 2013 8:05 AM PT
Hedge fund manager and rogue Apple investor David Einhorn hosted a conference call for shareholders Thursday as he continued his campaign to steer more cash from the company's balance sheet toward investors.
Einhorn, a manager at Greenlight Capital, used the call as part of his broader strategy to pressure Apple to issue a stockholder dividend rather than let the company's US$137 billion lay idle. That strategy includes a lawsuit filed against Apple earlier this month; Einhorn claims the company's proposed changes to its charter -- which will be decided during next week's annual shareholder meeting -- are illegally bundled for a vote.
Plenty of corporations save cash, Einhorn acknowledged during the call. However, he argued that his proposed stock issuance could come from Apple's free cash flow by using what he called "iPrefs" -- a class of stock at a $50 value with an annual dividend yield of 4 percent, or $2.
The iPrefs would be attractive to investors looking for high yields, while also leaving Apple free to continue its business operations and keep making the products that Einhorn said he can't live without.
Apple CEO Tim Cook has been aggressive in his opposition to Einhorn's lawsuit, calling it a "silly sideshow" and a "waste of shareholder money" during a recent appearance at a Goldman Sachs conference.
Apple did not respond to our request to comment for this story.
Hoping for a Successful Campaign
Other than Cook's comments, Apple has generally dismissed Einhorn's complaints and refused to discuss them publicly. His crusade, however, might be hitting a nerve with the company, said Jesus Salas, professor of corporate finance at Lehigh University. He pointed to Microsoft as an example; it was in a similar position at its height and issued a dividend after media and shareholder pressure.
"I do think the media can have an influence on managers," he told MacNewsWorld. "I do think there is a strong possibility that Apple will start paying dividends at some kind, maybe a special dividend to start. Tim Cook does seem to care about public perception."
Drumming up shareholder support against one of the world's best-known companies comes with its challenges, though, said Dave Denis, professor of business administration at the University of Pittsburgh Graduate School of Business. That's especially true for a company like Apple which can point to a stock price that has fallen sharply from its $700 peak about six months ago.
"These campaigns are always difficult," Denis told MacNewsWorld. "To counter Einhorn, Apple can always point to the recent volatility in its stock price as evidence that their high cash flow position is not guaranteed in the future. This is the argument that Steve Jobs always used when he refused to pay out anything to shareholders. Maintaining a high cash balance is insurance against such volatility."
Would It Work?
If Einhorn were to prevail, the consequences are difficult to predict, said Salas, since cash isn't the only investor concern.
Apple's shareholders don't just want to know what the company plans to do with its $137 billion stockpile. They also want to know the next big product from the company. Apple recently reported record iPad and iPhone sales, but it hasn't released a new offering lately that has rocked the entertainment or mobile worlds.
That's making investors more nervous than knowing the company has a lot of cash it could spend, said Salas. Any move that makes it seem that Apple doesn't need that money for product development could come back to haunt Einhorn.
"People expect Apple to invest cash into new ideas," he noted. "If Apple were to start giving out their cash, it may signal to some investors that Apple has run out of ideas. In the end, I am not sure that Apple's stock price would rise too much if Apple paid a dividend."