This kind of stuff deeply annoys me. Yes, I understand Apple's fiduciary responsibility and I understand that technically, Einhorn may have a point.
But it annoys me that this is what companies deal with when they go public. Everyone thinks they're a manager now because they own some shares.
Are you not happy with the amount of money Apple is making? Are you not happy with their level of innovation? Their products? Then divest yourself of their shares.
We hire management teams to run companies. Let them do their job. I know, I know, again - technically as a shareholder you have a right to have a voice and yadda yadda yadda but lawsuits like this are exactly what public CEOs talk about when they say that they dread running public companies and can't take a long-term view because shareholders only care about quarter-by-quarter performance.
Indeed, Apple's massive success story over the last 15 years probably had a lot to do with ignoring Wall Street outright. This is easier said than done, as most CEOs feel enslaved by the quarterly reporting cycle. Apple made long-term bets instead of short-term optimizations on paper.
So the interesting question is: why was Apple able to do this, when other major corporations can't seem to shake their Wall Street shackles? I would guess that it had a lot to do with an early chain of big hits. The iPod, followed by the massively successful generations of subsequent iPods and iTunes, gave Jobs a large degree of immunity to criticism (and he still got quite a bit of criticism!). The iPhone had its pre-launch naysayers, in finance and in the press, but Apple's share price didn't take any real damage as a result. And so on with other product launches, up until recently.
Prove the analysts hugely wrong for years on end, and eventually their critiques won't hurt you. But getting to that point in the first place is the tricky part.
"Why was Apple able to [ignore Wall Street outright], when other major corporations can't seem to shake their Wall Street shackles? I would guess that it had a lot to do with an early chain of big hits. The iPod, followed by the massively successful generations of subsequent iPods and iTunes"
I agree, but the chain of hits started with the iMac, which quickly became the bestselling personal computer ever.
Also, Jobs had already demonstrated his ability to make tough decisions: when he became interim CEO at Apple, he appointed an entirely new board of directors, chose new VPs, slashed many product lines (Performa, Newton, Network Server, QuickTake, LaserWriter, etc etc), and he wouldn't take more than $1 in salary.
I find it annoying when companies who don't have a need to invest all profits into themselves and have little chance of being acquired don't pay dividends. Otherwise what's the point of owning a stock? To resell it at a higher price? That's fine I guess but you're offering no value or investment opportunity to long-term investors. Profiting in this case ultimately requires a fool willing to overpay.
Edit: or if there's no fool, the company could buy back shares, but at that point you should seriously consider just paying a dividend.
If you don't agree with the financial management of a company, then don't invest in it.
Dividends are only one way to get value out of cash reserves in a company. I'd argue that if the company knows what the hell it's doing, handing away the fuel that helps it to execute on its strategy (cash) is the worst thing to do.
It's implicit that they think Apple does not know how to reinvest that cash in a way that will provide a return that is commensurate with the risk of Apple stock. I don't think that is a stretch, given how much they have. If my cash is sitting in a bank account at Apple my investment is exposed to Apple's risk, I'm going to be upset about it.
If they can't invest it in a way that covers their cost of capital, it is their duty to pay it out, not to sit on it.
I just don't get it. If you think that Apple exposes you to too much risk then don't invest in them.
it is their duty to pay it out
How so? Did they commit to giving out dividends as a part of your purchase of their stock? Are they siphoning the cash out of the company to avoid giving shareholders value?
Sitting on cash has been an Apple strategy for a very long time, even before Jobs came back. How have they deceived shareholders by continuing with it?
Not investing the money at a risk-adjusted profitable return is the same thing as taking money from shareholders. Think about it this way. If there was one owner in the company, and the CEO just couldn't figure out a way to invest the company's cash at a profitable rate (again, risk-adjusted), what would the owner do? He'd take it out of the company and invest it elsewhere or just buy something - because he owns the company and it's his money.
When you have multiple shareholders, the concept is the same, it's just harder to hold management's feet to the fire.
This is different than "sitting on cash" as a strategic decision. It is wise to do so - there might be investment opportunities or hard times down the road. But we are talking about excess cash - cash beyond the level that is reasonable to sit on for strategic purposes. To sit on excess cash (which is admittedly a judgement call) is to hold your shareholders' money hostage in an unprofitable manner. Given how much cash Apple has, I don't think it's unreasonable for shareholders to grumble a bit.
Except that Tim Cook has said on shareholder calls that they have more cash than they know what to do with. At that point they should distribute more to shareholders.
Apple is paying a dividend. I wouldn't worry too much about how much money they are sitting on. Having very large cash reserves allows them to buy companies that have technology they want to integrate into their products and keep it away from competitors. It has allowed them to pre-pay for production of products, manufacturing equipment and other tooling that ensures they meet market demand for new products while keeping that same tooling out of the hands of competitors etc. One of my clients hired fifty new employees in one month last year because Apple pre-paid for a supply of chips and the company needed to ramp up production. They couldn't have moved that fast without the infusion of cash.
I agree with you for the most part, but I don't think profiting requires a fool willing to overpay. If you bought Google stock at the IPO because you thought they would be a dominant player on the Internet, you will have made a 600% return if you sold today. That's not to say that the person buying today is overpaying for the stock - they just think that Google will continue to grow in the future.
Apple's spending $10B this year in CapEx. Some of that is for datacenters and some of that is for the new headquarters and stores.
That's $2B more, or about %25 more of the total than last year. If you just look at the expenditures on production (Eg: buying the equipment used to make their products) it seems to have grown ~%33 in the past year.)
It could easily be the case that Apple spends %10-%20 of its cash each year on these efforts, as it needs to scale its business at double digit rates.
Having 10X your annual CapEx spending in the bank doesn't seem exactly irresponsible. Quite the opposite.
You seem to be operating without a deep understanding of how the economics of companies and stocks work. Each dollar in cash adds a dollar to the value of the stock, assuming no multiple. So, someone paying an additional dollar for that stock is not overpaying, and thus is not considered a "fool".
Companies are valued by people like Buffett on their return on cash, or return on equity, and other such measures. Do the analysis for Apple and see what those figures are and then compare them to other companies like Microsoft, Amazon and Google.
I think you'll find Apple is being well managed financially, and the value delivered to investors by these current strategies is quite good, as represented by these standard metrics (that require more research than the average journalist or investor will likely do, but that value and growth investors regularly do.)
Thus you invocation of the "greater fool" theory is not supported, and I challenge would be completely undermined if you calculated these metrics.
You're minimizing what share ownership means. The shareholders own the company. The only reason the company exists is for their benefit. The fact that they have a right to voice their opinions isn't some mere technicality. It's rooted in the fact that it's their company--management, etc, just works for them.
And I agree that Wall Street is overly concerned about quarterly earnings. But that's the way the game is played. In 1980, Apple went to Morgan Stanley to get help selling its soul to Wall Street (for a cool $100 million). Today, 33 years later, Wall Street still owns it (65% of Apple's shares are held by funds and institutional investors). That was the deal.
If a majority of shareholders wanted this proposal, or some other proposal, they could get it in the proxy statement and then get it passed.
What's happening here is a lawsuit to try and do an endrun around the process by which the shareholders exercise their rights.
Hell, shareholders vote for the members of the board of directors.... shareholders could choose to nominate and vote for board members that support the idea if they wanted.
A shareholder lawsuit isn't an "end run" around the process. It's one of the options in the process. Companies incorporate under statutory frameworks that explicitly contemplate shareholder lawsuits in addition to other mechanisms for shareholders to assert their interests. Investors, in turn, buy stock with full knowledge of (and indeed, often because of) the fact that lawsuits are an option shareholders have to assert their rights.
In this case, you have to distinguish between "I think Apple should be managed differently" and "hoarding cash amounts to a breach of fiduciary duty." The former is about general corporate strategy, and that is governed by majority consent of the shareholders. The latter is a right specific to each shareholder, and so cannot be waived by majority consent.
Why is the process structured this way? For obvious reasons. Say you're buying a 25% stake in Apple, but back in the 1970's before it was Apple (remember, the rules of the arrangement as decided prospectively, before anyone knows how things will turn out, not retrospectively, after everyone knows the company will be a hit). You might be willing to leave general corporate strategy to a majority vote. However, if you think the company's actions actually amount to misuse of your capital investment, you want to be able to sue, not just submit your grievance to the majority vote.
Fully agree, the point of shares and exchanges is for the company to raise capital, not for traders to bitch about how the company is run.
If Einhorn had a fucking clue about how to run Apple he should start a tech company, since he doesn't he should shut the fuck up.
His share price bullshit is a fucking distraction while the biggest turfwar in tech history unfolds, exactly how does a $32 increase in share price benefit Apple? The $100 billion in the bank means they don't need additional capital. That it is underperforming means their management is focused on building a pile of cash, not managing a pile of cash.
However, with a pile of cash like that, imagine if Apple decided to create an iBank, now that would be a way to leverage huge returns from that pile of cash while simultaneously disrupting a massive industry weighing our economy down.
Also, Apple had some horrible times in the 90s. They only survived because they had a nice amount of cash when shit started to broke down. IIRC they went from 30 billion to 4 billion in quite a short time and Apple was literally on the brink of bankruptcy (I believe Steve Jobs said in an interview that Apple had about a month left when the Microsoft deal came through).
I think it's fine for a company to have a nice amount of cash ready in case of some big setbacks. Especially since Apple seems willing to take huge gambles these days to enter new markets (iPod, iPhone, iPad and soon the Apple-designed TV I'm sure). And I think Apple needs these gambles to succeed, because eventually competitors will eat away profits at the lower ends of the "older" markets, slowly taking a bigger piece of the pie.
I don't think most stock holders are that much interested in the company or it's products but would rather make a quick buck. The interests are different. And spending money on stockholders would mean having less money to spend on the company. I don't see what Apple could gain, except perhaps some goodwill from stockholders.
I truly believe the Apple designed-TV will come either this year or next year and I also think this TV will revolutionise the market. I can imagine Siri being used instead of a remote control, for example (Steve Jobs had said he had gripes with the remote control). Once Apple enters this market, I think there's a very good chance Apple's stock prices will rise like crazy again. Stockholders will be able to sell the stock with huge gains.
You have it exactly backwards. If shareholders want more cash, it is theirs to demand. They don't have a "right to a voice", they own the company. And it has nothing to do with being public.
Sounds crazy, but here's where I think he got the idea:
"while Apple for now uses Braeburn primarily in its capacity to find legal tax loophole all around the world and avoid paying taxes, there is no denying that with a cash balance that in a two years may be well over $200 billion, applying even a modest amount of leverage would make AAPL the best capitalized bank, mutual fund or asset manager in the world."
"...it is not an investment advisor: it merely manages an ungodly amount of cash for AAPL's millions of shareholders. There is also no SEC filing 13-F filing on Braeburn's holdings. As such, not confied by the limitations of being a "long-only", it is in its full right to hold any assets it feels like, up to and including CDS on housing, puts on Samsung, or Constant Maturity Swaps that pay if the 10 Year collapses. It just doesn't have to report any of them.
Nobody knows: and that's the beauty of Braeburn. It is the world's largest hedge fund that is not really a hedge fund, nobody has heard of, and nobody knows just what assets it holds. Which is precisely what Apple wants."
This headline is wrong and very misleading. Even the source article headline breaks out the two items - "Greenlight's Einhorn sues Apple, seeks bigger payout"
They're related, but the actual point of the law suit is at the bottom of the article:
Greenlight said it is opposed to the proposal, No. 2 on Apple's proxy, which the firm said would remove the company's ability to issue preferred stock from its charter.
He isn't suing to force Apple to release cash. He's suing so that Apple doesn't change the rules that would make it harder to get preferred shares out to shareholders.
It's more correct to say that he's suing so that one avenue for divesting cash doesn't get removed from the table.
One interesting quote from the article. Apple shares are currently worth $458.70. Apple has cash reserves which are equivalent to $145/share.
I realised Apple had a lot of cache, but that really does seem to be getting to ridiculous proportions, effectively 1/3 of the value of the shares is a pile of cash which it seems Apple continues to sit on, doing nothing useful with, or having no good plans for (of course, who knows what is going on behind closed doors).
Having enough cash to, on demand, fund creation of new technologies at commodity prices is a VERY powerful industry tool.
IIRC, Apple wanted "retina displays", there weren't any producers for want of enough capital to build the production facilities, so Apple wrote a check for well over a billion dollars to have the factory built, and built to a level where production was as cheap as if it had been running for many years, approaching commodity prices. Result? First product line to feature such high resolution, and at a price competitors couldn't come close to matching.
Likewise other technologies and supply chain issues.
You can't move that fast, stay that far ahead, with costs that low, without the ability to fork over VERY large amounts of money on a moment's notice.
All I have to say is - fuck Wall St. Apple's cash generates power and leverage that's simply not quantiyable in quarterly statements. Apple has already instituted dividends as well as a one-time payout to their investors. And having around $100B means that if they lay down $20B for some super strategic shift, it doesn't require debt to be serviced.
Wall Street wants all companies beholden to the quarterly cycle - and if that company has to kill it's future to make the quarter, then so be it - all the better for those who make money on both sides of the trade.
That's bad for the company and bad for customers.... all so the hedge fund manager can make an extra bonus by killing jobs and US competitiveness.
That's why wall street doesn't like it. Apples has the benfit of being public without relying on wall street for its financial future. I guess hedgefonds and banks are less than happy with having little to no influendce on the most valuable company in the world. So every now and then someone tries to sue his way in. Business as usual I guess...
You are assuming that spending money is always a better solution than not spending it. I think you are misled.
The fact they have 100 billions in cash and not willing to jeopardize their culture and focus is a proof of their dedication to do what's best for the company.
I'm not saying spending money is always better than spending it, but there is a balance. At this point 'Apple' by itself is one of the world's biggest hedge funds. Apple is not just sitting on cash, it is doing it's own investment.
If the owners of Apple think they can do a better job with that giant pile of money, then they are quite within their rights to ask to be given at least some of it. They can still leave Apple with a bigger reserve than any other tech company around.
One of the obligations Apple voluntarily accepted when it chose to go public, and which it continues to voluntarily accept as long as it remains public, is the fiduciary obligation to its shareholders.
Retaining cash without returning it to the shareholders is a violation of its fiduciary obligations to its shareholders. The fact that it could use the cash to fund R&D, etc., is irrelevant since Apple is clearly not doing so.
That being said, that is not why the hedge fund manager is suing Apple. He's suing to prevent Apple from eliminating preferred shares, which provide enhanced dividend and liquidation preferences.
I wonder if Apple is looking into acquiring a big player or two. With $137b in cash, they can buy both Facebook and Twitter at current valuations and still have $50b left over.
So by suing Apple he's hoping they divest themselves of some cash by paying lawyers to go to court?
I suppose I can see the point of view of Apple has a lot of money not doing a lot, why not pay it back to investors, but I thought that was what the share dividend program was for? I may be missing something, financial and stock market knowledge isn't my cup of tea.
Not quite. Public companies have a fiduciary responsibility to earn their shareholders money. This Hedge Fund manager is claiming that Apple's large cash reserves are contrary to their fiduciary responsibility, and they need to only keep enough reserves so that normal business can continue, the rest being returned to investors.
Companies don't have any responsibility to the shareholders. Directors of the company do. However that responsibility does not extend to making money for the shareholders. In the UK and the US directors have a huge amount of latitude in running the company and it basically resolves down to making "good faith" decisions for the betterment of the company.
Ah that makes much sense. Although, how does someone define what reserves a company should keep for business to continue? Especially in the tech world where they might need to drop a billion dollars on an acquiring another company.
True, but Apple now has enough money to buy Facebook, and Twitter, and still have $50bn left over. I'm not sure how much is "enough reserves", but it seems reasonable to me to expect Apple to justify it.
From how I see it they're suing Apple for not reducing investors risk: if they have a lot of money now why don't give away some of it a make investors feel less afraid of future losses, specially when there's the sensation that the Apple's iPhone business may have already peaked.
This is a great move by Einhorn and turns up the pressure on Apple to return cash to shareholders. I don't have a preference about the preferred shares, I'd prefer they get rid of it just from a corporate governance standpoint and to keep the capital structure simpler. They should significantly increase the buybacks and raise the dividends, and they should issue debt in the US to avoid paying taxes on overseas cash (and work on lobbying for a holiday) to pay for it.
Apple has more cash than they need, and Tim Cook admitted this when their cash balance was under $100 billion when he announced the dividend and buyback.
Debate the magic of Steve Jobs if you want, but I don't think anyone can deny that one of Apple's strengths is in avoiding conventional wisdom and finding a more profitable path.
Imagine if people sued Apple to try and make them license their OS to others![1]
This is the worst kind of back seat driving.
[1] I do think that Apple licensing iOS to companies like HTC, Samsung, etc. with a strict quality control program would make good business sense, but despite being long Apple, I realize it's not my place and there are probably many factors that I'm not aware of. The problem of not being able to meet demand, and needing to compete at the lower end of the price spectrum would be solved by my proposal, but Apple likely has other plans to solve this problem. At the end of the day, it's up to the Management Team and the Board to address these issues, not minority shareholders!
But it annoys me that this is what companies deal with when they go public. Everyone thinks they're a manager now because they own some shares.
Are you not happy with the amount of money Apple is making? Are you not happy with their level of innovation? Their products? Then divest yourself of their shares.
We hire management teams to run companies. Let them do their job. I know, I know, again - technically as a shareholder you have a right to have a voice and yadda yadda yadda but lawsuits like this are exactly what public CEOs talk about when they say that they dread running public companies and can't take a long-term view because shareholders only care about quarter-by-quarter performance.
Annoying.