SHAREHOLDER ACTIVISM

Carl Icahn wants to rescue Apple investors from a record high stock price and flawless balance sheet

“Activist investor” is one of the great misnomers in finance, an industry that is not afraid to misappropriate phrases to make itself look better. And few “activist investors” (you might prefer “corporate raiders”) are as successful and influential as Carl Icahn.

The septuagenerian New Yorker has has made billions for himself and his investors over the years by purchasing stakes in underperforming companies and then pressing for changes and/or overthrowing management to unlock value for shareholders.

One of his more recent targets: Apple. Earlier this year Icahn pushed the company to put some of its ample cash (much of which is stored offshore and can’t be repatriated without being taxed) into stock buybacks— a simple piece of financial engineering that makes shares more scarce, and in theory more valuable. The company obliged, and since Icahn invested, the stock price has increased significantly.

Today, Icahn fired off another missive to CEO Tim Cook and the Apple board, calling on Cook to “meaningfully accelerate and increase the magnitude of share repurchases” to help rectify the “massive undervaluation of Apple in today’s market”.

Adjusted for a stock split that came earlier this year, Apple shares already are trading near record highs, driven largely by optimism surrounding the iPhone 6 and Apple Watch. But Icahn claims the stock could be worth roughly double its current value if the buyback was ramped up.

For the record, Icahn shares in the enthusiasm for the new product lineup. The watch, he said, “revolutionizes the entire category from both a hardware and software perspective.” And he suggested the company could do the same for televisions in the coming years.

[W]e believe we have good enough reason to expect the introduction of an UltraHD TV set in FY 2016. We think television represents a large opportunity for Apple, one that reaches far beyond “the hobby” that Apple TV currently represents.

Unusually, he also heaped praise on management, describing Cook as “the ideal CEO for Apple.” It’s painfully polite and friendly stuff.

Buybacks are undeniably boring. As Matt Yglesias has pointed out, they don’t do much for society as a a whole, certainly compared to alternative uses of capital such as wage increases or investments in operations. Their efficacy relative to that other form of boring capital management, dividends, also is fiercely debated in corporate finance circles. Especially when shares are at record highs, like Apple’s are now, repurchases bring out the skeptics. Effectively, Icahn is urging the company to buy back its own shares at the top (or, to let him cash out on his position at the top, although he promised in the letter “not to tender any of our shares if the company consummates any form of a tender offer at any price”).

When Icahn speaks, the market listens. His Apple letter already has had the desired effect—the stock is up 1% today. And the reality is, if there is any sign that the company is going to bow to his pressure, they’ll probably go even higher.

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