David Einhorn is absolutely right, but its even better than that. What he is proposing will not materially change the value of the business, but it would transfer risk from common stockholders to preferred holders while at the same time forcing the market to recognize a more appropriate value in Apples stock. This is no different than what private equity guys do. It's just leveraging the balance sheet and extracting the cash up front while dumping the risk on debt holders (in the case of private equity they dump the risk on banks and bond holders in Apples case Einhorn is advocating we dump the risk of the business on preferred holders). He is 100% right. There would no problem finding 500 billion dollars of yield pigs to take on our risk while allowing us to immediately recognize the value in our common stock.
Einhorn could be "right" but he is "wrong" in going on a media campaign....Apple said "no" and by Einhoen going public will likely be less inclined to adopt Einhorn's position or one similiar in the future and just lead to more frustration by shareholders....wrong move by Einhorn.
I hear you, but even if he can't convince the board it still should highlight to any money manager with half a brain how severely undervalued apple is.
Remember the value of the underlying business doesn't change in any material way with Einhorn's plan, what does change is that common shareholders can retain and even get the value up front on the business while still maintaining control and any imcrimental upside, while at the same time transferring the majority of the risk to preferred holders who would be willing to take that on for just a mere 4%. You can thank the Bernanke for that. I'm with Einhorn. We should do this and do it know.
i think it is a clever idea that he has proposed to cook yesterday. lets see if apple financial advisers can make a recommendation to the board on this matter. so far he is only asking shareholders to vote NO to the proxy on apples proposed abolishment of the preferred.
here's a contrarian view:
If Apple issued $50 billion of new preferred stock, this preferred stock would be "senior" to Apple's common stock--the stock that trades for about $450 a share these days. What that means is that, if Apple got liquidated tomorrow, the folks who owned the preferred stock would get $50 billion off the top before Apple's common shareholders got anything.
If the market is behaving even remotely rationally, the market should therefore respond by knocking the value of Apple's common stock down by about $50 billion.
In other words, if Apple issued $50 billion of this new class of preferred stock tonight, the price of Apple's common stock should open tomorrow at about $400 a share.
Because no matter how good a financial engineer you are, you can't just wave your magic wand and make something out of nothing.
If Apple issues this stock tonight, the value of Apple's enterprise and assets will not change. All that will change is the form of ownership of, and claim on, these assets. And the folks who own the $50 billion of preferred stock will have a more senior claim on those assets than the folks who own the common stock.
Einhorn may believe--and he may be right--that Apple's issuing preferred stock will befuddle mom and pop investors who won't take the time to understand that they now have a claim to less of Apple's assets than they did before.
And Einhorn may hope that, as a result of this befuddlement, the market will misprice the preferred stock and common stock, thus allowing him to do what every financial engineer wants to do--appear to create something out of nothing.
And, again, Einhorn may be right. He's brilliant. And anything is possible.