Einhorn Drops Apple Lawsuit, But $AAPL Cash Still Looms Large

| Analysis

David Einhorn's Greenlight Capital hedge fund has dropped a lawsuit against Apple over a management-backed shareholder proposal that would have prevented Apple from issuing preferred shares without shareholder approval.

After receiving an injunction blocking a vote on the proposal at Wednesday's Apple shareholder meeting, the suit was effectively rendered moot, but the issue of Apple's cash hoard still looms large.

$AAPL DividendsiPrefs

Mr. Einhorn wants Apple to issue a preferred stock to shareholders—he dubbed them iPrefs—that would pay a permanent dividend. He has argued publicly and vociferously that such a move would be the best way for Apple to return more of its vast cash hoard of $137 billion (and growing) to its shareholders.

Apple hasn't ruled out such a measure, but the company put forth a proposal that would have required the company's board of directors to seek shareholder approval before doing so. Apple CEO Tim Cook argued that doing so would empower its shareholders, while Mr. Einhorn argued that it would be an unnecessary impediment in issuing the shares.

The foundation of his lawsuit, however, was that Apple bundled the measure with two other measures, and that this was a violation of Apple's own bylaws. A federal judge agreed and issued an injunction preventing a vote on the proposal—Proposal 2— at Apple's annual shareholder meeting.

That injunction and the meeting passing by without a vote effectively accomplished Mr. Einhorn's goals, eliminating the need for the suit.

“Apple removed the bundled proposal from the shareholder meeting, therefore resolving the issue,” Jonathan Gasthalter, a spokesman for New York-based Greenlight, told Bloomberg, which broke the story.

Money Money Money Money

What isn't moot, however, is the issue of Apple's cash. Apple has a staggering amount of cash that is many, many times more than it has ever shown a need or will to use.

One thing Apple does do with its money is leverage it to get favorable component deals, control key elements of its supply chain, and invest in infrastructure. Back of the napkin math says that US$20-$30 billion ought to handle that, but only if we're rounding up liberally.

Apple also buys companies. Apple CEO Tim Cook recently said that Apple has been averaging an acquisition every other month over the last three years. That's something you need cash for (or stock, but Apple uses cash), but Apple has never spent more than a half billion dollars in an acquisition.

That's because Apple doesn't buy revenue streams, it buys technology and people. Apple buys small companies it can integrate into the Apple culture. Apple has never demonstrated a desire to spend, say, $20 billion buying a big company.

So being extraordinarily generous, there's another $10 billion per year Apple has shown it needs to have lying around.

Do the math. $50 billion in cash would leave far more than Apple needs for its operations—Tim Cook himself acknowledged more than a year ago that Apple has more cash than it needs.

DividendThe problem is that Apple has $137 billion in cash, and it's adding at least $40 billion a year these days. Apple has committed $10 billion per year in a dividend, and it committed another $10 billion (total) to a stock buyback program, but that's a drop in the bucket.

How about making an investment return on that money? There was once a time when a significant portion of Apple's profits came from interest on its cash holdings. We're talking about pre-iPod days here, when Steve Jobs was in the process of building Apple into the juggernaut it is today.

Those days are gone. Apple is earning less than 1 percent return on its cash, a shockingly small return even in the age of record-low interest rates. Apple CFO Peter Oppenheimer has said that Apple's investment arm is focused on wealth-preservation rather than seeing a big return.

If you add up all those issues, Apple has too much money, and that money belongs to shareholders. David Einhorn's suit may have gone away, but the underlying issue of what to do with its money hasn't gone anywhere.

*In the interest of full disclosure, the author holds a tiny, almost insignificant share in AAPL stock that was not an influence in the creation of this article.

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2 Comments

Lee Dronick

I am thinking that Apple is planning to put a lot of that cash into manufacturing facilities here in the USA and some other countries.

Bosco (Brad Hutchings)

Here’s the business angle on this. The existence of Einhorn’s lawsuit identified the giant elephant in the room that is dragging down share price and will probably keep it dragged down until Apple responds with deeds, giving Einhorn and other investors like him a longer window to buy low and lock in dividends.

I think Einhorn’s strategy will be very effective. Google, with about 1/3 the cash on hand, is getting a lot of grief, but at least as the Motorola trump card it can use as evidence that it will make big ticket purchases. Apple, not so. Apple’s purchases and moves just to replace the hated Samsung as a supplier have been way more expensive than just accepting some downside with dealing with Samsung. These move have made everything bad about Apple’s product cycles and supply chain management much worse.

The best use of Apple’s cash on hand would be to repatriate way three quarters or more of it and pay out dividends. The cash on hand would support 5-10 more revolutionary products like iPhone or iPad. But the problem is that Apple doesn’t have 5-10 more of those in its sights. In fact, it’s debatable whether Apple even has one. This makes all that idle cash on hand a liability and a drag, because it could be doing much better things elsewhere in the economy.

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