Einhorn says Apple ‘iPref’ stock would unlock pent up value

“Star hedge fund manager David Einhorn has a new product that he wants Apple Inc. to offer: the iPref,” Jennifer Ablan and Poornima Gupta report for Reuters.

“In an unusual hour-long public conference call on Thursday, Einhorn, who has filed a lawsuit against Apple as part of an effort to get the iPhone and iPad maker to distribute more of its $137 billion cash pile, detailed the merits of distributing perpetual preferred stock to reward investors and boost a share price that he says is undervalued,” Ablan and Gupta report. “‘This is not complicated, it’s merely unfamiliar,’ Einhorn said about his perpetual preferred stock idea. ‘Here’s the product that Apple doesn’t yet know it needs,’ he said, a riff on the mantra of Apple co-founder Steve Jobs that consumers don’t know what they want.”

Ablan and Gupta report, “Einhorn said Apple should use $47 billion in cash to issue preferred stock with a quarterly dividend of 50 cents in perpetuity. The stock would be in high demand, he said, because “savers across the country” are in desperate need of yield. ‘It has a base value of $50 and pays a dividend of $2 per year,’ he said. ‘Apple can redeem them for face value, but shareholders should not anticipate getting the face value. They should expect to receive 50 cents per quarter, every quarter, forever.'”

Read more in the full article here.

MacDailyNews Take: Forever is an awfully long time.

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Einhorn’s Greenlight Capital: Every Apple shareholder should get preferred shares ‘for free’ – February 21, 2013
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Einhorn’s lawsuit against Apple hangs on ‘irreparable harm’ – February 20, 2013
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Judge approves Apple request to expedite Einhorn’s Greenlight Capital case – February 11, 2013
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  1. +1 for Ace

    preferred stock never unlocked the value of anything. this asshat merely wants Apple to piddle money into his pocket instead of investing it in product development & retail expansion. Milking profits now is a bad move, especially with the competition only heating up.

    That being said, Einhorn does have a point: Apple should be using its cash, not sitting on it. It’s understandable that investors would get impatient when managers aren’t rolling out new products or even signaling any new initatives. Sh!t or get off the pot, Cook!!!

    1. Bullshit. Having that cash pile is a huge asset that Apple has that its competition does not have. It allows them to do things they could not do minus that cash pile and its existence is entirely mandatory to play in the high risk high stakes high rewards categories that Apple plays in. It is already being out to work.

      1. Being put to work doing what? At what rate of return?

        If you can’t answer that, then it’s almost certainly underperforming what Apple earns from its operations and therefore more capital should re-injected back into the business. Cook wouldn’t have this problem unless professional investors weren’t fed up with him sitting on way too much unused cash. The only area where one can disagree with Einhorn is that most Apple investors don’t share his opinion that Apple’s cash pile should be given to Eihorn and his ilk at preferred rates.

        1. Actually, with the interest rates on liquid assets being so low right now (check the T Bill), the “opportunity lost” of Apple’s cash is similarly very low. Given also that there’s no EASY investments where a substantially higher yield – – with minimal downside risk – – and the decision on what to do with the resource becomes far less obvious. Or perhaps you would prefer them to go buy some money-loser company?

          In any case, what Einhorn says he wants isn’t some unknown new product: they’re called ANNUITIES and he can go buy them from any number of Life Insurance Companies … Met Life, Prudential, etc. Oh, and and $2 per $50? That’s a 4% rate of return: if Einhorn (or anyone else) can show me where today I can lock in a *no-risk* 4% guaranteed return, I’ll drop $100K into it before lunchtime today. Such investments simply do not exist today.


          1. Apple’s gross margin on sales has been about 40% for several years.

            So you want Apple to expand its business and continue earning 40% with its capital investments with some real risk, or you want to stop the growth and instead take a 4% guaranteed payout?

            I’ll vote for company growth, thanks.

          2. BTW, here’s a little life insurance industry update (education) on the 4% rule … for Einhorn to read (!):


            And a key statement:

            “With today’s low interest rate environment, the 4% rule is no longer a safe bet. A study by Texas Tech professor and Research magazine contributor Michael Finke shows that, because interest rates are about 4% lower than their historical average, the anticipated failure rate for the 4% rule has gone from 6% to a 57%, meaning that if the 4% assumption is used, your chance of running out of money before life expectancy is 57% of the time.”

            Translation: there’s a 57% probability that a 4% dividend rate will not be sustainable for 25 years (approx) … which falls centuries short of the “FOREVER” that Einhorn claimed.


  2. As soon as you assign a 4% yield to an equity the value of the equity is calculated (ROI) on that yield, ie., whats the value of a $10,000 Corporate Bond yielding 4%? Answer: $10,000. Now what if Treasury Notes or Bonds from other sources yield 5%. Your $10,000 Corporate Bond written with a 4% yield is now only worth $8,000.

    This is the lamest idea in all of investing.

    AAPL isn’t down because investors aren’t getting 4% on their investment, AAPL is down because Apple’s actual performance hasn’t met the public’s outsized expectations for 3 quarters. This isn’t Apple’s fault, its the fault of investors not listening to/reading management’s conference calls since April 2012. Had they done so expectations wouldn’t have been so high, and Apple’s performance would have seemed much better.

    Einhorn, and others like him are self-aggrandizing assholes.

  3. Here’s what it sounds like to me:
    He wants Apple to issue preferred shares to all AAPL stockholders at a guaranteed minimum value of $50 a share at no cost to the current shareholders.
    This locks up $47 billion of Apple cash that it can’t use for anything other than backing the stock (in case someone wants to sell it back to Apple for cash).
    With a stock horde of 1.3 million shares that’s a minimum of $65 million immediate “value” given to Einhorn’s fund — at no cost.
    Einhorn sells the new stock at $50 a share (or trades it at — he hopes — a higher value) and nets an immediate $65 million profit for his fund (and a nice, huge profit for himself, personally).
    The preferred stocks trade independently of the common stock and large funds get more control over it by buying it up as they can tell their funds (hedge or otherwise) that there’s no real downside. There’s a guaranteed minimum. The preferred stock (controlled by the big guys) floats higher and the big guys make out.
    Big investors start moving around huge chunks of the new stock and drive the price of the common stock down. (Einhorn even admits that it could drive the price of common stock down to $350 or less a share.)
    Apple, Inc.’s official profit goes down because of the guaranteed return on these preferred stocks. And Wall Street beats up the common stock accordingly. The common stock goes down even further, because the preferred stock is considered to be unassailable because it has a minimum guarantee.
    Big investors and hedge fund managers make out like crazy all guaranteed a minimum value of $50 a share for this preferred stock. There’s really nothing but upside for them personally.
    Little investors (think people that have a few hundred shares of AAPL, or less) get screwed.

    Any way you look at it, the big institutional investors and fund managers make out. Apple, Inc. gets nothing — other than locking up $47 billion in cash that can’t be used for other things. And the little investor with common stock gets screwed as the common stock falls.

    1. No, you have the basic details wrong. Once the preferred shares are issued, they’re issued. Owners can sell them on the secondary market, but Apple doesn’t have to buy back anything or use any cash to back them up. In fact a strength of the plan is that they can use the cash for whatever they want. Apple’s only obligation is to pay the dividend out of earnings. Wall Street can keep beating up AAPL common, but given the already low p/e ratio, the odds are more it going up, as in the case of Texas Instrument or IBM, both considered shareholder friendly and given a much higher p/e.
      Why do you think little investors will get screwed? They can keep the preferred or sell it at their will, at favorable tax rates if kept a year. The danger of the plan would rather be if interest rates went up much higher (possible, but not likely in the near future) or if one hold LEAP call options, which not many smaller investor do.

      1. Shadow is correct: Apple would be obligated to pay dividends, which ties up cash that is better used elsewhere. And it’s not likely that large fund managers would be selling much preferred stock on the secondary markets. Small investors would be priced out immediately. This is just a ploy to extract cash from Apple’s overseas pile.

        Apparently people forget what a stock market used to be. Its intent was not supposed to be used so that traders can enrich themselves by extorting companies. The stock market was for entrepreneurs to “crowd source” capital to put new ideas into production. Brokers facilitated the transactions, that is all. Now setting up 2-tier stock systems, leveraged buyouts, and complex derivatives is just the tip of the iceberg of Wall Street gambling & chicanery intended to extract money from small investors and companies alike — with impunity and at no risk to traders whatsoever. Wall Street traders are not “capitalists”. They are the dealers at the biggest gambling hall on the planet, and they seldom if ever lose. Why any successful company would bend to the demands of Wall Street is beyond me.

        Apple: concentrate on product excellence and customer service. Ignore Einhorn and other Wall Street cronies. Customers and investors will applaud steady company value appreciation much more than any growth-limiting dividend you could dole out.

  4. What a snake oil salesman.

    If Apple feels it doesn’t need all its cash, they should be buying up stock at these prices at an accelerated rate, without announcing it ahead of time.

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