Carl Icahn’s letter to Tim Cook asks Apple to commence immediate $150 billion buyback

Carl Icahn’s letter – the one he tweeted about yesterday – has been posted to Icahn’s new Shareholders’ Square Table (SST) website. Here it is, verbatim:

Dear Tim:

It was a pleasure meeting you for dinner at the end of September. When we met, my affiliates and I owned 3,875,063 shares of Apple. As of this morning, we owned 4,730,739 shares of Apple, an increase of 22% in position size, reflecting our belief the market continues to dramatically undervalue the company, even when taking into account the recent market appreciation, which in turn makes our proposal unchanged with respect to a $150 Billion buyback. We were pleased to hear at our dinner that you appreciated our input and that you would speak to us again in three weeks to continue the dialogue. In anticipation of doing so soon, we aim to reiterate in this letter the point of view already expressed to you directly with the hope of effectively summarizing it for the company’s board of directors and our fellow shareholders.

From our perspective, Apple is the world’s greatest consumer product innovator and has one of the strongest and most respected brand names in history. We consider Apple to be our most compelling investment. I first informed my followers on Twitter on August 13, 2013 of my “large position.” I also expressed to you my opinion that “a larger buyback should be done now.” At that time, we owned 3,448,663 shares and the stock price was $467. Since then we have purchased an incremental 1,282,076 shares (bringing the total value of my position to $2.5 Billion) and we currently intend to buy more.

We want to be very clear that we could not be more supportive of you, the existing management team, the culture at Apple and the innovative spirit it engenders. The criticism we have as shareholders has nothing to do with your management leadership or operational strategy. Our criticism relates to one thing only: the size and timeframe of Apple’s buyback program. It is obvious to us that it should be much bigger and immediate.

When we met, you agreed with us that the shares are undervalued. In our view, irrational undervaluation as dramatic as this is often a short term anomaly. The timing for a larger buyback is still ripe, but the opportunity will not last forever. While the board’s actions to date ($60 billion share repurchase over three years) may seem like a large buyback, it is simply not large enough given that Apple currently holds $147 billion of cash on its balance sheet, and that it will generate $51 billion of EBIT next year (Wall Street consensus forecast).

The S&P 500 trades at roughly 14x forward earnings. After backing off net cash, Apple trades at just 9x (not factoring into account that the company has a significantly lower cash tax rate than the rate Wall Street analysts use). This discount (cash adjusted) becomes even more compelling given our confidence that Apple will grow earnings per share at a rate well in excess of the S&P 500 for the foreseeable future. With such an enormous valuation gap and such a massive amount of cash on the balance sheet, we find it difficult to imagine why the board would not move more aggressively to buy back stock by immediately announcing a $150 Billion tender offer (financed with debt or a mix of debt and cash on the balance sheet).

While this would certainly be unprecedented because of its size, it is actually appropriate and manageable relative to the size and financial strength of your company. Apple generates more than enough cash flow to service this amount of debt and has $147 billion of cash in the bank. As we proposed at our dinner, if the company decided to borrow the full $150 billion at a 3% interest rate to commence a tender at $525 per share, the result would be an immediate 33% boost to earnings per share, translating into a 33% increase in the value of the shares, which significantly assumes no multiple expansion. Longer term (in three years) if you execute this buyback as proposed, we expect the share price to appreciate to $1,250, assuming the market rewards EBIT growth of 7.5% per year with a more normal market multiple of 11x EBIT.

It is our belief that a company’s board has a responsibility to recognize opportunities to increase shareholder value, which includes allocating capital to execute large and well-timed buybacks. Apple’s Board of Directors does not currently include an individual with a track record as an investment professional. In my opinion, any further delay in executing the buyback we hereby propose will reflect this lack of expertise on the board. My firm’s success and my expertise as an investor would be difficult for anyone to argue. Per my investment thesis, commencing this buyback immediately would ultimately result in further stock appreciation of 140% for the shareholders who choose not to sell into the proposed tender offer. Furthermore, to invalidate any possible criticism that I would not stand by this thesis in terms of its long term benefit to shareholders, I hereby agree to withhold my shares from the proposed $150 Billion tender offer. There is nothing short term about my intentions here.

Sincerely,

Carl Icahn
Chairman, Icahn Enterprises (IEP)

Related articles:
Carl Icahn sends letter to Tim Cook, pressures Apple for a buyback – October 23, 2013
Activist investors like Carl Icahn destroying companies, costing jobs, says corporate attorney – October 9, 2013
Carl Icahn’s Apple buyback seen failing in bonds – October 7, 2013
Henry Blodget: Apple should tell Carl Icahn to ‘stuff it’; America should be incredibly proud of Apple – October 2, 2013
Apple should not bow to Carl Icahn – October 1, 2013
Carl Icahn says firm now has $2 billion in Apple shares; another meeting with Apple in 3 weeks – October 1, 2013
Carl Icahn demands $150 billion from Apple – October 1, 2013
Will Carl Icahn pick a fight with Apple? – October 1, 2013
Tim Cook to meet with Carl Icahn on Monday in New York City – September 26, 2013
Carl Icahn scoops up Apple stock on post-iPhone event plummet – September 13, 2013
Carl Icahn buys ‘quite a bit more’ Apple shares following unveiling of iPhone 5s and iPhone 5c – September 11, 2013
Carl Icahn’s ulterior motive: To get Apple to buy Nuance – September 3, 2013
Carl Icahn to dine, discuss buybacks with Apple CEO Cook in September – August 22, 2013
Icahn to meet with Apple CEO Tim Cook in September – August 22, 2013

53 Comments

    1. “It is our belief ”

      That there is the problem Carl. He should probably say “my” instead of our because I too am a stock holder and don’t agree with you at this time.

  1. Well of course he’s not going to sell! He wants a seat on the board (last paragraph about expertise) and he wants to sell his $467 shares at $1200.

    Lovely dinner conversation, don’t you think, where Tim is paying dual attention to the words and the hidden agenda?

  2. And once the buy back has been completed, Carl&co will dump all their shares to make a
    massive profit and move onto the next victim to drain the blood from.
    My advice to Tim, simply don’t give in to bullies.

  3. There is a flaw in the plan. Who would sell shares at the proposed tender offer price, knowing that the stock would increase by 140%?

    Am I missing some of Carl’s logic?

  4. Corporate Raders have only one goal in mind; Sucking the lifeblood from a company for short term gain. They care nothing for the long term future of the company. They care nothing about creativity or R&D for long term product development. Carl is a classic corporate raider – always has been, always will be. Hopefully the majority of AAPL shareholders will have the foresight to help resist his vampirism.

  5. hell no iCan’t. Apple needs this money for future strategic ventures. Tech does not stand still and Apple cannot afford to be boxed out of future technology. The war chest is future proofing.

  6. iCan’t wants Apple to get into a leveraged debt situation so he can understand it like the companies he raided in the 80’s. He cannot grok a balance sheet that does not bleed crimson red.

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