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The Forbidden Apple: David Einhorn, a longtime Apple (AAPL) bull, has sued the technology giant.

By: Chris Ciaccia
Posted: 2/11/2013 12:56:00 PM
Referenced Stocks: AAPL;NFLX

Apple (AAPL) has had its share of enemies in its past, but it now looks like one of its biggest supporters is about to turn the tech giant upside down. What does this all mean exactly?

Longtime Apple bull David Einhorn of Greenlight Capital has sued Apple, seeking to stop Apple's proposal to do away with preferred stock, known as Proposal 2. Einhorn, who owns 1.1 million shares of the Cupertino, Calif.-based Apple, believes that by doing so, it restricts "the Board's ability to unlock the value on Apple's balance sheet."

Einhorn put out a press release last week to notify existing shareholders and the media to his case, as he seeks to unlock the value of Apple's enormous cash hoard (some $137.1 billion), and deliver a higher share price. "We believe Apple must examine all of its options to unlock the growing value of its balance sheet for all shareholders," Einhorn noted in the release. "Over the past several months, we have had an ongoing dialogue with Apple regarding one option to do so, namely the creation of a new security, a perpetual preferred stock that would be distributed at no cost to Apple's existing shareholders, and would provide an attractive, sustainable dividend while preserving Apple's financial resources to pursue its business strategy."

Einhorn has been a staunch Apple bull, and recommended such a strategy in May 2012 at the Ira Sohn conference in New York City. He noted that Apple could issue preferred stock, paying anywhere between 4% and 6%, and could allow the market to properly value the cash hoard Apple has, and perhaps make Apple worth $1,000 per share. This idea seemed creative at the time, although it did not gather much support or attention from the audience, the media and Wall Street. Now Einhorn has turned up the heat.

He's forced people to realize that the market may not be valuing Apple's international cash (nearly $94 billion) properly, for any number of reasons. Apple historically does not do large M&A transactions, and shareholders seem to be voting with their money that they may never see the true value of that cash. Einhorn has proposed a way that would allow Apple to keep the cash, but unlock the value of it. Unfortunately, with nearly 75% of Apple's cash being held overseas, issuing preferred stock that would pay a dividend does not seem feasible, unless Apple were to repatriate the cash to actually pay the dividend, something that does not seem likely to happen anytime soon, given the state of Washington D.C. and its stance on overseas cash.

Led by CFO Peter Oppenheimer and Treasurer Gary Wipfler, Apple has always been understated in its use of cash. Apple has shied away from major acquisitions, only doing small tuck-in acquisitions, such as Siri, PA Semi, and AuthenTec. I would not expect Apple to go out and buy Twitter or Netflix (NFLX), that's just not their style. With never-ending rumors of an Apple-banded television, perhaps Apple does something with a content company, but that remains to be seen.

Einhorn drawing attention to Apple's "problem" (wouldn't it be nice to have so much money you couldn't figure out how to spend it?), is a good thing for Apple and its shareholders. Apple responded to Einhorn's statement, by saying it would "thoroughly evaluate Greenlight Capital's current proposal to issue some form of preferred stock." CEO Tim Cook is set to appear at a technology conference later this week, and the ever growing cash hoard will likely be a topic of conversation.

I don't expect Apple to follow through and not move forward with Proposal 2 (many other shareholders have come out in support of Apple, including CalPERS), it's drawn light to the fact that Apple has significantly more cash than it needs to run its business. Apple hinted at this on its first-quarter conference call, saying it would reevaluate its dividend and buyback program, of which it plans to return $45 billion to shareholders over three years.

Apple will likely give back even more of its cash hoard to shareholders when all is said and done. Ultimately I would expect Apple to increase its dividend/buyback program slightly, thus providing a greater return to shareholders. Einhorn's solution may not come to pass in the way he wants it to. However, sparking conversation and providing out-of-the-box thinking to a "problem" can only lead to one outcome: happier shareholders in the end.