Carl Icahn is wading deeper into the weeds of technology. Fresh from defeat at the hands of Michael Dell, whose leveraged buyout he opposed without accomplishing much, the corporate raider has now proposed a dramatic plan for Apple that is couched in a lot of highfalutin' rhetoric and seems generally a bad idea.
Last Thursday, the corporate raider tacked his equivalent of Martin Luther's The 95 Theses to the door of the Internet with a tweet announcing a new Website where shareholders may join what he called a "fight for true corporate democracy."
The first big target posted on Icahn's activist Web page, shareholderssquaretable.com (the name evokes investors' lack of suffrage in the boardroom), is Apple (ticker: AAPL).
In an open letter to Tim Cook, Apple's CEO, Icahn refines a proposal he has been hailing for months, namely that Apple should dramatically accelerate its share repurchases. Apple's current buyback, already the largest in corporate history, totals $60 billion over three years, roughly 13% of the company's market value.
That's not enough for Icahn. He reminds Cook in the letter of the simple math he'd presented when they dined together last month, a plan he insists is a "no-brainer." Apple should use a combination of cash from its $147 billion pile, and debt borrowed at 3%, to fund $150 billion in buybacks.
With Apple shares trading at a ridiculous below-market multiple of nine times forward earnings, the mega-repurchase would boost Apple's earnings per share, and its value, by one third, Icahn claims. He even predicted that in three years' time, the stock could rise to $1,250, as its shares see multiple expansion. He pledged to hold on to his own $2.5 billion in Apple stock and not sell into the tender, a show of good faith.
Ominously, Icahn warned that a failure to do as he suggested would reflect the board's lack of financial expertise. And on CNBC on Thursday, he went so far as to say he would be willing to consider a proxy fight if Apple doesn't go along.
Now, what all this has to do with democracy, I've no idea. Apple under late founder and CEO Steve Jobs was probably more of a benevolent dictatorship. And while the board of any company serves in a sense as the shareholders' representatives, the notion of a democratic government is dubious in the context of a corporation.
Let it be noted, moreover, that Icahn's habit of amassing large stakes in order to push his particular views does not seem in any way democratic.
Leaving all of that aside, Icahn's proposal is wrong for a couple reasons and should not be indulged by Apple. As Warren Buffett noted on CNBC two weeks ago when asked about Icahn's plan, the act of buying back acres and acres of stock in one fell swoop is really a way to reward those who sell the stock, not those who stick with it. That alone makes it seem a lousy thing to do. Buffett implied to the channel's Becky Quick that Apple should stick with its current and ample buyback plan.
Second, large shock-and-awe buybacks of the kind Icahn endorses, along with other windfalls such as special dividends, have not had much benefit in recent tech-stock history.
Microsoft (MSFT) in July of 2004, after several years of poor stock returns, announced to much fanfare that it would double its regular dividend, pay out a special one-time $32 billion cash dividend, and kick off a program to buy back $30 billion of its stock, equivalent to 10% of its market value at the time.
The stock actually fell 18% by the time all that was done in 2006, though it was a less-harrowing 7% if you count the dividend.
IN HIS DEFENSE, Icahn points out that Apple is not a bank, and with $147 billion in cash doing nothing on the books, and with $50 billion in free cash flow coming in annually, the company can and should take on debt to do something constructive. "A lot of shareholders agree with what I'm saying," he told me in a phone call.
Icahn insists he's not just trying to push the stock price up. "Why would I not want to see the earnings [per share] of a company I respect boosted by 30%?" he says, insisting that he is in Apple for the long-term. He adds that "If the board says no" to his great idea, "then why not put one of my people, who have the financial expertise, and the experience, and the track record, on that board."
Icahn notes that in a number of situations, companies have appreciated his contributions and even asked him to participate again.
Despite all that, it's hard not to come away with the impression Icahn is saying Apple's shares, which are flat this year, and down 25% from an all-time high last year of $705.07, absolutely must rise in price tout de suite, and that unless Apple does what Icahn thinks it should to goose the price, it is being derelict in its obligation to shareholders.
Nowhere is it written that good governance begins with managing the stock price to constantly drive it higher. Nor does the notion of creating value for shareholders equate to guaranteeing that the share price is forcibly jammed heavenward by one and only one means, in this case a massive repurchase. It is Icahn alone who has deemed the buyback the litmus test of corporate responsibility.
THERE ARE MANY ROADS TO ROME, and another notion, perhaps too dull for Icahn, is that Apple continues to produce terrific products, and that over time the share price will reflect that fact.
Apple this week unveiled new iPads that show the company is at the top of its game. The new iPad Air is thinner and lighter, which caused some people to roll their eyes, shrug, and ask, What's new, exactly?
But both the Air, and the new iPad mini, are upgraded to a more powerful processor that is many months ahead of the competition, and all while preserving battery life. This is no small feat, and it sets up the device line to be more of a PC replacement in years to come. That's innovation, and that's leadership.
In the meantime, If Icahn is right, and Apple has too much cash, it is up to Apple to solve that problem. To demand to financially engineer the company is not very different from telling Apple how to make iPhones and iPads. It's the business of the company to decide its fate.
Tiernan Ray can be reached at tiernan.ray@barrons.com, http://blogs.barrons.com/techtraderdaily or www.twitter.com/barronstechblog
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