David Einhorn is not alone; Brian Gerick from Pensylvania has also filed a lawsuit against Apple Inc. (AAPL) seeking to prevent the iPhone maker from pushing for a shareholder vote on February 27 regarding two proxy proposals. The first of these seeks to eliminate a provision called “blank check preferred.” This allows a company to issue an unlimited number of preferred shares of any type.
The second proposal refers to an advisory “say-on-pay” vote on executive compensation. The lawsuit alleges that Apple has failed to reveal details of how it decides on the pay of top executives. In a broader sense Gerick is blaming Apple for clubbing together unrelated issues into a single shareholder vote.
Einhorn’s accusations are far more focused and centre on Apple’s cash pile which amounts to nearly $140 billion. The activist investor grabbed the limelight by going short on Lehman Brothers, which folded up shortly afterwards.
Though Einhorn is betting long term on the iPhone maker he believes Apple is accumulating cash which is more or less sitting idle. The weighted average rate of interest that the company receives from its cash, cash equivalents and marketable securities amounted to just 1.02% in fiscal 2012 and 1.07% in the first quarter of 2013.
Additionally, Apple’s share price has fallen to around $470 from more than $700 in September. Einhorn claims that around $145 of the current share price of $470 can be attributed to Apple’s huge cash reserves. This implies that the market thinks the rest of Apple’s business is worth only seven times the company’s earnings.
This is quite low when compared to Google, Inc. (GOOG) which is nearly three times more. In fact, Apple’s multiple is much lower than Microsoft Corporation’s (MSFT). This despite the fact that the company derives the largest chunk of its revenues from PC operating software, which many worry is a segment that may be sinking.
Yet, Apple is a company whose profit profile is shining. The company has continued to deliver a bevy of successful products and has posted robust results quarter after quarter. It has now put in place a dividend and stock buyback program which is projected to cost $45 billion over the next three years.
Android-powered smartphones from Samsung and other smaller players have emerged as the company’s only serious competitors. Meanwhile, Nokia Corporation (NOK) has launched its new Lumia series whereas Research in Motion Limited (BBRY) has launched two phones based on its new OS BlackBerry 10 in an effort to recapture lost ground.
Einhorn believes that by sitting on this cash pile Apple is hurting shareholder value. He has hit on a radical solution to this situation. He proposes that Apple should issue $610 million of preferred stock in perpetuity to shareholders which would pay a dividend yield of 4%.
The company would then have to pay small amounts compared to a one time dividend payment or stock buyback. It would also add to the company’s net worth, he argues.
Apple has responded by seeking to put to vote the provision to issue an unlimited number of shares. The company’s CEO Tim Cook has described Einhorn’s lawsuit as a “silly sideshow”. He said the company welcomes all suggestions from shareholders including Einhorn and the management team and board were actively discussing them.
He added that regardless of the outcome of the lawsuit, Apple would not issue preferred stock without assent from shareholders. He also said the company would continue to acquire a company every two months. Gross margins could be increased by selling more software and services. Ultimately, Cook believes that Apple holds a long term view on its business despite the fact that people “worry about quarters.”
A fund manager at T Rowe Price Group, Inc. (TROW) said he was encouraged to hear that Cook thought the Einhorn proposal was creative. If Apple continues to push the boundaries in product innovation, it could surely render such debates redundant. Till then the likes of Einhorn will keep knocking on its cash fortress.
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