David Einhorn is not alone. Brian Gerick from Pensylvania has
also filed a lawsuit against
) 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 center on Apple's
cash pile, which amounts to nearly $140 billion. The activist
investor grabbed the limelight by going short on Lehman Brothers
before the firm 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
This is quite low when compared to
) which is nearly three times more. In fact, Apple's multiple is
much lower than
). This is 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.
) has launched its new Lumia series whereas
) 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.
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Apple has responded by seeking to put to vote the provision to
issue an unlimited number of shares. Apple 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
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.
) 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.