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back to article Carl Icahn broadcasts his $150bn Apple shakedown effort to world+dog

Activist investor Carl Icahn has reiterated his recommendation to Apple CEO Tim Cook that Cupertino blow $150bn to buy back company stock, and this time he has shared his reasoning with world+dog. "We find it difficult to imagine why the board would not move more aggressively to buy back stock by immediately announcing a $150 …

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Anonymous Coward

This assumes Apple stock goes up for three straight years.

With Apple stock slipping, the investors will eventually demand that 150 billion as a dividend.

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Yup. Undervalued my backside.

But I get what he's trying to do...

Extract the cash while it's there, then the corp value can tank as much as it likes.

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Re: Yup. Undervalued my backside.

Using your cash to buy back your shares already sends a bad signal to the investors. It means you have no clue what to do with the money. You are not planning to expand.

Apple makes very nice things, but there is a lot more that it can do. It has a kind-of cloud service that does not really live up to its name. It has a map service that is still playing catch-up. But Apple is not using its cash to try to make them better; it is paying a dividend instead. Google and Amazon would never do such a thing. As far as they are concerned, the sky is the limit and everything is invested for growth.

That is why using your cash to buy back your shares is a bad thing. Now, borrowing cash to buy back your shares is just plain stupid.

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Re: Yup. Undervalued my backside.

One can also make the argument that overreaching into new markets far from a companies traditional competency where there is not a lot of opportunity has also brought a lot of heavy weights down in the past. Not saying that is the case with Apple but it seems all too often upper management would prefer to give themselves bonuses and muddle on about with some pretend big new strategy burning cash instead of returning any cash directly or indirectly to investors.

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Using your cash to buy back your shares already sends a bad signal to the investors

No it doesn't. On the contrary, numerous empirical studies have shown that share buy-backs increase shareholder value. Look through the 1970s and 1980s editions of the Financial Analysts Journal, the Journal of Finance and others if you don't believe me.

This is because cash on deposit earns an interest rate lower than the rate of return the company is getting from its core business. Therefore, the weighted return being earned is being suppressed by the low interest rate on the cash. Shareholders can deposit cash themselves so they don't pay management a premium to do it on their behalf. Instead, the share price is depressed because of the lower than otherwise weighted return. Return that cash to the shareholders and two things happen:

1. the share price drops (because the cash-backed portion of the share price has just been returned to the shareholders); and

2. the share price increases (because future 'weighted returns' will be higher);

These two movements happen at the same time. The observed result is that the share price falls by less than the amount of cash that's been returned, ie. the shareholder is better off: his portfolio of shares+cash is now worth more even though the share price has 'fallen'.

So why hasn't Apple done this already? Because of US Tax laws. US companies with highly profitable foreign subsidiaries in tax jurisdictions that have a lower tax rate than the US, eg. Ireland, find it next to impossible to repatriate that cash back to the US without paying to the IRS, the difference between the two tax rates. Paying taxes reduces shareholder value. The pre-tax profits a company earns get split 3 ways : tax payments to the IRS, interest payments to any bond holders and then whatever is left goes to the shareholders (either as a cash dividend or retained in the company to be paid out later). The more tax the company pays, the less available to the shareholders. This problem has always been there for Apple. It's just that shareholders are now beginning to take more notice of it because the outlook for Apple is not as rosy as it was when Steve Jobs was around. While Steve was there, shareholders didn't care too much about the repatriation issue, because Apple was so profitable and looked as though it was going to continue to make stellar profits for its shareholders. Now that he's gone, everyone is beginning to question the future 'stellar' profitability of Apple. People are looking around for more value and the repatriation of foreign profits issue has taken on greater importance.

That's why shareholders want Apple to find ways of repatriating the cash without paying any more taxes.

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Anonymous Coward

Re: Yup. Undervalued my backside.

The generally accepted idea behind a share buy-back is to reduce the number of shares in the market and the value of the remainig shares rises to compensate thus increasing the return to the shareholders....

One company that has done a lot of this over the years is IBM.

Just google/bling for 'IBM Stock Buyback' and see for yourself.

Don't slag of Apple for this. What they are doing is SOP for many companies in a similar position.

Where you can IMHO slag them off is that as has been commented elsewhere is that they have more than enough cash in the bank/offshore to buy some key suppliers outright thus securing continuity of component supply.

I'd also resist Apple making any large purchases (> $5B) unless it is clear that the company being bought is key to their technology path.

I was an Apple shareholder. I held 2K shares from 1995 to 2012. That's my retirement funded. I still hold a good number of IBM shares. Their buyback and dividends get the thumbs up from me.

anon simplt because I don't want any 'retirement income plan' shysters spamming me.

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Re: Using your cash to buy back your shares already sends a bad signal to the investors

Errr ... you do know that Apple has $145bn in cash in tax-heavens, don't you ? Therefore, taking a credit of $150bn to buy back it's own shares leaves Apple naked, without any disposable money anymore. There was an article here yesterday about what Apple should do for it's future, and some argued that there is nothing to worry for a company having $145bn in cash, but this is a sure way of blowing it all up at once, and leave absolutely nothing in return.

Apart for those "investors" who profited from the buyback.

That money in tax-heavens is not really available, if Apple now repatriated this money and paid taxes on it and paid dividend with part of the remaining, and invested the rest in new developments, that would be a bold move.

This iCahn looks to be for Apple what Elop was for Nokia.

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Re: Yup. Undervalued my backside.

Actually, regardless of whether buying shares back is sensible or not, borrowing the cash to do it isn't so stupid. With huge reserves of cash in the bank, Apple can command miniscule interest rates on borrowed money - and it's likely they would borrow this money from their own major shareholders, not banks.

The shareholders agree a valuer of interest that gives them more than they would receive if the money was in a bank somewhere - a win for shareholders.

This also means Apple pay the interest, not the capital, back to the investors, not the bank. So officially no dividend is paid out, but Apple still give money out. Another win for the shareholders, at a better taxable level than dividends.

This money then comes out of that column in the ledger that counts up how much of Apple's money is liable to be taxed - a win for Apple, though not the IRS. The cash reserves continue to grow and the share price increases further.

And Apple buy up shares with the borrowed money, thus increasing the value of the shares and making the shareholders richer.

So yeah, it sounds like borrowing money to inflate the share price might sound stupid, but actually the rich get richer.

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Re: Using your cash to buy back your shares already sends a bad signal to the investors.

While that might be a true statement, there is an even worse signal to send to investors: that you have no idea how to invest your cash reserves and aren't going to pay them either. Which is exactly what Apple have been doing and why they now find themselves being targeted by Ichan.

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Dell shareholders told Icahn to go stuff it, so now he's trying to squeeze some money out of Apple by convincing them to run up the share price so that he can dump his shares at a tidy profit.

If he was REALLY into Apple for the long haul, he'd start writing his name as iCahn

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@ Darryl

Dell was a company in free fall, Apple is a company with too much cash on the books. The two situations are not equivalent. Asset strippers don't help the first. They do the second as long as the board limits them to moving the cash to the investors, which is where the profits belong in the first place.

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Anonymous Coward

"Apple's Board of Directors does not currently include an individual with a track record as an investment professional asset-stripper."

There, Carl. FTFY.

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Dear Carl

iShare values are doing just fine w/o Apple doing anything designed exclusively to raise the value of your iShare holdings

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Anonymous Coward

this is a bad thing how exactly ?

""Apple's Board of Directors does not currently include an individual with a track record as an investment professional,"

That's probably why they're one of the most valuable companies in the world.

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Icahn's point

His point is: they could be more valuable.

See my previous post for an explanation as to how.

What he's saying is: Apple, you're in the computing business, not the investment business. You have (had?) a fantastic track record in the computing business and earned returns over and above those of your competitors. But not so for your investments. You have not shown an ability to invest excess cash and earn risk-adjusted returns that are superior to those of the professional fund management industry. You do not even have a Board member who has such a track record. Therefore, give the shareholders the excess cash so they can invest it for themselves. You are not doing them any favors (sic.) by denying them ability to do it while at the same time earning them a non-superior return.

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He made a bunch of money off of Netflix

http://www.deadline.com/2013/10/carl-icahn-unloads-netflix-shares/

I noticed he didn't ask them to buy back shares.

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"Activist investor" Carl Icahn

Reads better for me as "Parasitic shyster"

Thats all.

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While Mr. Icahn is surely successful,

I doubt that the colour of his nose is cause by toffee. He appears to be quite far up his own backside which might have a similar browning effect.

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Trollface

Icachn can't even make his own argument make sense

I found this comment of Icahn's especially funny: " irrational undervaluation as dramatic as this is often a short term anomaly." That is, Apple's low share price won't last long, so get buybacking!

Of course, if Apple's price is about to go up on its own, why would you consider paying out Apple's cash to do so?

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Slightly confused

So, he says that the shares are undervalued, so he wants Apple to spend its cash reserves to increase the value of them, as he also thinks the lower than should be value is an anomaly and that the price will increase by itself anyway.

Why would Apple do that? If the value is going to go up anyway, why bother wasting the money on buying them back?

Why not use the money to actually increase value - investing in other companies, creating new products through R&D etc...? The things a technology company should do in the first place, and which will increase share price properly, rather than fiddling around with the balance sheet.

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Re: Slightly confused

"Why is he so confident? Simple. "My firm's success and my expertise as an investor would be difficult for anyone to argue," he sniffed"

Like he was successful with his plans for DELL?

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Re: Slightly confused

It all depends on what Tim Cook's been set as objectives by the board. Is he to raise the number of iThings being bought, or is he to maximise the share price? Increasing the share price by either allowing the value to rise naturally to its should-be level and increasing it through a buy-back are not two seperate ends of the spectrum on a one or the other deal. The two could happen in conjunction, and what iCahn is saying is take advantage now of an unrealistically low share price, the share price willin time increase of its own accord to reflect what it should be AND the price will also increase due to the increased interest in the market, albeit self-fabricated interest.

Apple owning more of its own shares means that it owns more of its own assets - such as the massive the cash reserve it's got. Limiting the amount of shares on the market means that the board's controlling stake increases as a percentage, and the value of that stock increases.

Saying all that, iCahn is a scrote. A rich scrote, but a scrote all the same.

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Icahn lets himself down

"if the company decided to borrow the full $150 billion at a 3 per cent interest rate to commence a tender at $525 per share, the result would be an immediate 33 per cent boost to earnings per share, translating into a 33 per cent increase in the value of the shares."

Yes, there would be an immediate 33 per cent boost to EPS, but I doubt if this translates into a 33 per cent increase in the value of the shares. For the reasons I have outlined above, the share price will actually fall. Just like any share does when it goes ex-div.

Icahn is simply perpetuating a well known myth in financial markets called 'EPS Bootstrapping'. Again, emprical studies have shown, ad nauseum, that investors are not fooled by such 'spectacular' EPS growth from one-off financial conjuring.

It's a shame he's done this because is overall message (paying out the excess cash will increase shareholder value) is bang on with the empirical evidence. Making yourself look stupid by resorting to a disproven and totally ineffective Jedi Mind Trick, does his cause no "favors" (sic.).

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FAIL

Does not compute

By Icahn's logic, Apple could borrow 450 billion and buy back 3 times as many shares, making earnings per share double and leading to share prices doubling. What I fail to see is why the hell anyone would then want shares at twice the price in a company that owes almost as much as it is capitalised at.

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