Evaluating David Einhorn’s proposal to Apple

Suman Chatterjee writes for Seeking Alpha, “Last week, David Einhorn, the hedge fund manager of Greenlight Capital that owns between 1.3 million and 1.5 million shares of Apple, initiated a ‘Proposal 2 awareness’ campaign against Apple. His only concern with the company ‘he apparently loves so much’ is as follows (source: Apple website): ‘However, like many other shareholders, Greenlight is dissatisfied with Apple’s capital allocation strategy. The combination of Apple’s low (and shrinking) price to earnings multiple and $137 billion (and growing) hoard of cash on the balance sheet supports Greenlight’s contention that Apple has an obligation to examine all options to create and unlock additional value.'”

“As evident in the message above, he is concerned about shrinking capital gains margin with holding an Apple stock,” Chatterjee writes. “As a potential solution to that, he advised Apple to distribute “free” preferred stocks to the existing common equity shareholders at a predetermined dividend rate. Not to forget the fact that these preferred stocks will have the provision to be traded just like a common stock.”

Chatterjee writes, “While Einhorn wants to get more money for the Apple shareholders, it looks more as if the hedge fund magnate is trying to compensate for lackluster fund return of Greenlight Capital. Is he looking for compensation for the fall in share price and, thus, lower fund return? Activist investing might be good for the fund managers but for the investors who truly believe in the company, Einhorn’s advice should be taken with a pinch of salt.”

Read more in the full article here.

Related articles:
The colossal gall of bad Apple investors – February 8, 2013
Cramer: By suing Apple, wrong-headed Einhorn has gone too far – February 8, 2013
Analysts: Apple may crack open its massive, bulging wallet for shareholders – February 8, 2013
Apple with $137 billion in cash considers preferred stock – February 8, 2013
Einhorn’s Apple lawsuit marks biggest investor challenge in years – February 8, 2013
Gamco’s Haverty: Apple’s cash is ‘shareholders’ cash’ (with video) – February 8, 2013
Apple shares surge following company response to Einhorn – February 7, 2013
Greenlight’s Einhorn sues Apple over plan to eliminate preferred stock, wants more cash distributed – February 7, 2013
Greenlight Capital urges Apple shareholders to vote ‘No’ on proposal 2 that would impede Apple’s ability to unlock shareholder value – February 7, 2013
Greenlight’s Einhorn sues Apple, ‘dissatisfied with capital allocation strategy’ – February 7, 2013
Legg Mason’s Miller: Apple stock would rise 50% on ‘sensible capital allocation’ alone – February 6, 2013
Gamco’s Haverty: Apple board can be sued over excessive accumulation of cash (with video) – January 28, 2013
Greenlight’s Einhorn: Apple ‘the best big growth company’; Fed stimulus ‘counterproductive’ – July 10, 2012
David Einhorn says Apple isn’t a below-average company, it’s just priced like one – May 30, 2012

24 Comments

    1. +1

      For some strange reason I don’t trust these wall street types. But I just can’t put my finger on it right now. Maybe it will come to me later. Sigh. 🙂

      Seriously, Apple is paying a reasonable yield (more would be great if the management team offers it) of about 2.4% while the S&P average is a little over 2%. I would wager that this is one of those cases where there is never enough. That is, give him 3% and he will then have some reason to get 4%. While I have lost faith in the stock market mechanism and my ability to understand how to predict when to jump in, I have the utmost faith in Apple management. Apple generated 23 billion in cash, $16 Billion added to cash and $13.1 Billion in net profit in one quarter. Think about it!

      The is cash going somewhere besides dividends and stock buy backs. I hope that cash is going to build factories (hopefully highly mechanized one is the good old USA) where Apple has materially more control of the process and to get shed of the partnership with Samsung which has turned sour.

      There are only 3 things that I cannot predict about Apple stock.
      1) When it will reached its all time high.
      2) When it will reached its all time low.
      3) What it will do next.
      Other than that, I am an expert. However, I think I have seen this movie before. And I feel confident that the rise in Apple stock and the range of its rise will be just as unexpected as its recent descent and range of descent.

      2 cents.

      1. Good point! If Einhorn wants higher returns for his shareholders, all he needs to do is Buy More AAPL shares at this depressed price! He will now get a higher yield of 2.4% for the shares he purchases now! And presumably, greater equity appreciation too! Problem Solved! These hedge fund managers should hire MDN readers as consultants!

      1. Thats too simple. Think about it, what investor/s know enough to run a multi-billion dollar tech corporation? AND, if they truly did know, why aren’t they running one?

        most people have no clue about how Apple runs, WS, tech writers and hedge managers are only looking out for their own interests, NOT that of their clients, and certainly not the best interests of Apple.

        Shareholders elect the BoD to run the company because they (The shareholders) wouldn’t have a clue how. Any wild knee jerk reactions by the shareholders, based on swEinhorn or other ‘experts’ would be stupid. WS and all ots cronies and stock manipulators know just that, how to play the market. That knowledge does not qualify them to run Apple.

        Most WS and others see the huge cash Apple has on hand, and rather than rewarding them for being responsible, and building a war chest with which to do tech company purchases, or invest in supply chain and parts inventory, form partnerships with other tech companies to advance the technology, and put things into place for the next big thing, all they want is the short term transfer of Apples’ future into their greedy pockets, Apple be damned.

    1. Or keep all your eggs in one basket, abd suck it up when it drops. AAPL has been so good to us, you can easily forgive an occasional 30% drop. It’s coming back. You just need patience.

    1. He’s nothing but a second-rate poker player caught with an empty hand. The mob isn’t going to be very happy if Apple ignores his desperate pleas. Don’t be too surprised if he disappears within the next couple of months.

  1. “However, like many other shareholders, Greenlight is dissatisfied with Apple’s capital allocation strategy.”
    Translation: Einhorn feels he is not getting rich fast enough, and Apple needs to fix this for him.

    “The combination of Apple’s low (and shrinking) price to earnings multiple and $137 billion (and growing) hoard of cash on the balance sheet supports Greenlight’s contention that Apple has an obligation to examine all options to create and unlock additional value.”
    Translation: Follow my plan, I get richer in the near term, I dump Apple stock at some later date driving the stock down further (but I won’t care as I’ll no longer be a stockholder).
    And…
    Since when was “additional value” locked up? Who locked it up? Reality? There is no such thing as “additional value”. It is a 100%, purely made up term used by people like Einhorn to hypothetically postulate that the is “money to be made out there” and they want to get a big chunk of it before anyone else does. The “additional value” isn’t any more real than my earnings are for the year 2075.

    “As evident in the message above, he is concerned about shrinking capital gains margin with holding an Apple stock,”
    No. He’s worried that he won’t make money fast enough. He really does not care about Apple’s “capital gains margin”.

    “As a potential solution to that, he advised Apple to distribute “free” preferred stocks to the existing common equity shareholders at a predetermined dividend rate. Not to forget the fact that these preferred stocks will have the provision to be traded just like a common stock.”
    Yes. He wants a select group to get the preferred stock with guaranteed minimum dividends (greater than the rest of the common stock) that he can get his money fast. Then, because that preferred stock is still tradeable, he’ll dump it and cash out — further generating short term gains FOR HIM — with absolutely no long term benefit to Apple or holders of common stock.

    “While Einhorn wants to get more money for the Apple shareholders, …”
    In a word: Bullshit. Einhorn wants more money for himself. In the long run he cares neither about Apple nor about the average shareholder.

    ” … it looks more as if the hedge fund magnate is trying to compensate for lackluster fund return of Greenlight Capital.”
    Absolutely. Finally this person gets it. Einhorn is in it for Einhorn and he does not have the smallest shred of ability to look past the next few weeks.

    “Is he looking for compensation for the fall in share price and, thus, lower fund return?”
    Absolutely yes. He’s looking for Apple to bail him out — to make his gain numbers for his fund look as good as he had been telling people it would be.

    “Activist investing might be good for the fund managers but for the investors who truly believe in the company, Einhorn’s advice should be taken with a pinch of salt.”
    How about a huge block of salt? Or better yet, walk completely away from this idiot and go with a salt free diet!

  2. i dont get the point of this article . it glosses over a set of facts already known to everyone and in the last paragraph urges us to take it with a grain of salt. one would think an author would state the arguments on both sides before asking anyone to take a stand and “salt” some wounds. i read nothing here that would give me pause to vote my shares one way or the other.

    1. Good observation. I’ve been on a soap box for a long time that if you read it on the internet its half-baked and self-aggrandizing. Chatterjee is just another among hundreds that prove getting a college degree doesn’t equal being knowledgeable about the subject at hand. It only means he can string 500 words together on a moments notice, hence the media term “stringer”.

  3. Chatterjee doesn’t get the U.S. tax implications right, in my opinion, for ordinary investors having incomes 400K (450K for couples). Einhorn’s scheme seems far more tax efficient, as the preferred shares would be (it’s my understanding) given to existing shareholders for no taxable implications until sales, likely at the longterm rate of 15%. Similarly, the dividends from the preferred shares would likely be qualified dividends, again taxable at 15%.
    But if Apple instead borrow the money and gave out bonds (instead of preferred shares), they would immediately be taxable at the marginal rate (say, 28% or 30%) and any bond interest would again be taxable at the marginal rate.
    Ergo, in my opinion Einhorn’s plan is more favorable to ordinary investors than Chatterjee has indicated.

    1. “for ordinary investors having incomes 400K (450K for couples)”
      Ah, so you’re talking about ‘ordinary investors’ being those who are in the top 0.75% of the population… (According to the the CBO, the top 1% have incomes greater than $382,593.)

  4. I bought in to Apple in 1997 and have stayed and am quite happy .
    Greenlight is a recent investor and has been burned by a pullback that they did not anticipate .
    Whilst I am sure Apple’s share price will recover , I would not be happy with any plan that sought to compensate people who arrived so lately to the party .
    This unadulterated self interest that is not enlightened .

Reader Feedback

This site uses Akismet to reduce spam. Learn how your comment data is processed.