Hedge Fund Magnate Takes Apple to Court
Feb 8, 2013 5:00 AM PT
Apple's cash hoarding has always annoyed some of its investors, but Thursday one of them decided to bet on a unique solution.
David Einhorn, a hedge fund operator with a history of staunch support for Apple, filed a lawsuit against the company in an attempt to block its board from giving away its power to issue preferred stock.
Issuing preferred stock is key to a plan Einhorn wants Apple to adopt that will dip into the company's US$137 billion in cash reserves and steer the money to investors.
The power giveaway, which would remove provisions from Apple's charter that allow its board of directors to issue preferred stock, is one of the items on Apple's latest proxy statement to be voted on at the consumer electronics maker's annual meeting.
"It is unusual for the board to be taking away its right to issue [preferred stock]," Martin Sklar, a hedge fund attorney and partner with Kleinberg, Kaplan, Wolff & Cohen told MacNewsWorld "They're asking the shareholders to take away their authority."
The Einhorn Way
The proxy move by Apple is apparently aimed at thwarting Einhorn's plan to tap into the company's cash reserves.
Under the plan, $50 billion in preferred stock valued at $1 a share would be issued to holders of existing shares of Apple common stock. Each share would pay an annual dividend of four percent forever.
However, if the board's power to issue preferred shares is removed by shareholders at Apple's annual meeting, then Einhorn's plan is dead.
There are lots of things Apple could do to bolster its flagging stock price, which has plummeted from a 52-week high of $705.07 to $457.57. The company could buy back stock or pay a higher dividend on common stock. Then there's Einhorn's plan.
Sort of Guarantee
"Einhorn is taking a very clever approach," Brian White, a securities analyst with Topeka Capital Markets, told MacNewsWorld. He explained that the shareholders get a nice dividend with an attractive tax rate -- 15 percent compared to the rate on earned income -- and Apple doesn't have to spend much cash.
"Apple's not giving the investors $50 billion out of its pocket," White maintained. "They're giving them $50 billion in IOUs in preferred stock."
While the dividend on the preferred shares is guaranteed, when Apple pays that dividend is not. If it doesn't have the cash to pay the dividend one year, it can defer payment to the next year. If doesn't want to pay the dividend then, it can defer payment again.
"You have no guarantee of getting dividends on any particular schedule when you have preferred stock," Sklar explained. "It's debt with an option to pay it."
Blow Off Einhorn?
Nevertheless, Apple doesn't like the plan. "They've been scarred by almost going bankrupt in the past," White noted. "It's like someone who lived through the Great Depression. They're very careful with parting with their cash."
However, that's true of all technology companies, he added. "Technology can change very fast, so all technology companies are hesitant to part with cash. They all have too much cash."
What Einhorn has done is create an inflection point in the discussion about Apple's cash reserves, White said. "It brings the issue into the media spotlight."
Not everyone, though, thinks highly of Einhorn's gambit. "This is MBA textbook stuff," Rocco Pendola, director of social media for the TheStreet.com, told MacNewsWorld. "It's classic business school here's-how-you-allocate-capital."
"What these guys don't understand is that what makes Apple great is it doesn't have to play by those rules, and it still generates massive returns for people," Pendola said. "I hope it blows off Einhorn, keeps its head down and executes whatever its plan is."