Breakout

Sponsored by

You’ve Been Icahned! Here’s Why We Could See a Spate of Investor Activism

Breakout

They say the squeaky wheel gets the grease, but when it comes to being heard in the boardroom, it pays to have a really large soapbox from which to make your plea. In short, the bigger your stake, the better their hearing.

Except perhaps in the case of Carl Icahn, whose $2.5 billion stake in Apple (AAPL) amounts to less then one-half of one percent of the computer giant's $477 billion market value. And yet, the New York-based investor has still managed to get the ear of CEO Tim Cook and convey the wisdom of doing a $150 billion stock buyback.

As my Yahoo Finance colleague Rick Newman and I discuss in the attached video, although the impetus for Icahn's latest imbroglio is built upon shaky grounds, it's also likely to be imitated by other activists given the dearth of alternatives.

"First of all, we have a slow growing economy. It's hard for a lot of companies to get revenues up. They can't get new business. They've delevered, so it's hard to get margins up," Newman says of what's behind this possible plea and potential uptrend in activism inspired by Icahn's bravado.

Because Carl Icahn is who he is, and because Apple is what it is, what is essentially an unoriginal idea has taken on mythical proportions. How can Tim Cook and the Apple board not look foolish if they were to show that they can be muscled into submission by someone with such a comparatively small stake?

At the same time, it would seem that Icahn's $150 billion suggestion may have been born of the 'ask for the sun, settle for the moon' school of negotiation. I mean, half a loaf for Icahn and Apple investors would still lead to one serious transfer of wealth!

At the same time, the move has, at the very least, set in motion a sorting process to determine who else is hoarding cash, and whether or not some old-fashioned arm twisting might garner similar results there. After all, Apple's shares have outperformed the market by about a 2:1 margin since Icahn first tweeted his new position and plans for the humbled giant formerly run by Steve Jobs.

Without even trying, Newman rattles off a half dozen other potential targets, including Microsoft, Intel, Cisco, and pharma companies J&J, Pfizer and Merck, before pondering whether this modus operandi even works longer term.

"It would be nice if we saw companies respond to this and say maybe it's time to invest some of this money," he suggests, since "it seems like companies are still in this crisis mentality."

And yet, longer term we both agree that the demand from shareholders to "get what is rightfully theirs" is not as easy as it seems at first blush. Since huge companies do need to make huge investments in their futures (especially tech companies) and often have a lot of their cash held overseas, their buyback plans would need to be funded elsewhere, which often means borrowing the money.

"This is not necessarily the best thing for companies to do," Newman argues, while reminding investors that the underlying catalyst for the buyback call is weak sales and profit growth.

More from Breakout:

Look Out Vix, Here Comes a New Way to Measure Volatility

Why Twitter's Valuation Will Soar Leading Up to IPO

Like it or Not, Gold Is Still a Safe Haven

View Comments