Unlock Apple's Value, iPrefs? David Einhorn's Apple Conference Call Summary

Feb 21, 2013 -

Here is a summary of Greenlight Capital David Einhorn's conference call. Einhorn discusses Apple should do with their excess cash. 



Conference Call "Greenlight Capital" Background:


  • Greenlight Capital is run by David Einhorn
  • He is a hedge fund manager who started it with less than a million dollars in 1996.
  • Einhorn worth about $1.1 billion. 
  • Part of his success largely came from successfully shorting Lehman Brothers in 2007. 
  • Greenlight Capital has held Apple stock since 2010.

Conference Call Highlights


Einhorn's conference call outlines a couple interesting points on how Apple can use its $137B cash. Note that a portion of the cash is overseas and would have to pay a higher tax to have it repatriated back to the US.

Basically Einhorn argues that Apple, while innovative with products is not innovative in managing its cash. The cash that is not used is decaying in value. In essence, there is an opportunity cost for holding so much cash on the balance sheet. Alternatively shareholder would like to see it being used for strategic options or distributions to shareholders.

While it is not unusual for technology companies to hold cash as a rainy day fund or to acquire companies, Apple's cash by far is more like a war chest than any rainy day fund. The reason why technology companies have so much cash is so that they do not need to rely on Wall Street to bail them out (if the time came).




Traditional methods of returning cash to shareholders include: 

  • one time cash distributions
  • one-time stock repurchase
  • on-going stock repurchases
  • dividend increase. 

For the most part, Einhorn argues that these methods do not necessarily help the stock price. Still one would argue that an increase in dividend or a stock repurchase would boost shareholder confidence in the stock and make it more shareholder friendly. However, these traditional methods may not be the best ways to return shareholder value.

Einhorn suggests "iPrefs"


They are basically perpetual preferred stock. Each iPref, which would have a face value of $50 and would pay out a dividend of $2 per year or 50 cents a quarter. For every one Apple stock you own, you would receive one iPref.

Basically this would dilute the common stock of course, but iPrefs would also have value. Through a series of assumptions and calculations, his argument is that in aggregate meaning the iPrefs and the common stock would be greater than the current stock price.

Whether or not this could be the case, it remains to be seen. In any event, all this arose because Apple decided to file a proxy in January eliminating preferred stock from Apple's Articles of Incorporation.

Cook has suggested that the powerpoint is a silly slideshow. You decide.


 
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