February 7, 2013

Hedge Manager Einhorn to Apple: Show Me the Cash

President of Greenlight Capital says tech giant stashes money like his ‘Grandma Roz’

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Hedge fund manager David Einhorn, president of Greenlight Capital, told Bloomberg Television on Thursday that "several hundred dollars per share would be unlocked if Apple were to follow through on this suggestion…It doesn't put the company at risk. It's not financial leverage in the sense that debt's considered to be."

"The call I had with them yesterday was very friendly, a very good tone of voice," Einhorn said. "I had a nice conversation with [Apple CEO] Tim [Cook] on this topic. He said he wants to review this proposal, wants me to meet with him and their advisers. "

Einhorn on his call for Apple to return more cash to shareholders:

"Apple is an extraordinary company with extraordinary products, extraordinary prospects, and we absolutely are enthusiastic about the stock. But we have a few suggestions as to how to help the shareholders make more money while allowing Apple to pursue all of its plan.

"For years, Apple's cash balance has built, and it has built up now to quite a sizable sum. A lot of this has to do with maybe a history—that Apple went through some rougher times and they never wanted to put themselves in that sort of position again. They want to build cash for acquisitions and strategic opportunities for harder times. We appreciate all of that. I think everybody does. There has been a lot of time where shareholders have said, could you give back some cash or dividends or buybacks, and that has been resisted until last year. We have looked at it and said there is a mentality here that is very hard to argue with.

"It is kind of like my grandma Roz. She wanted to hoard money. She would not leave me a message on my answering machine because she did not want to be charged for a phone call. It is really hard to convince somebody with that mindset to change what they're doing. We have come up with what we think is a win-win situation for Apple where Apple gets to keep its war chest, they get to keep the money, they get to have it for bad times, for growth, for acquisitions."

On whether Apple is greedy:

"No, no, this is the natural thing when you have a company that has gone through what Apple has gone through on a couple of occasions. They tend to react this way, and it is understandable. This is a win-win solution where they can have their strategy and their balance sheet, and yet the shareholders can get the value of what comes from that. We have a unique idea. We would say is what Apple should do is to say to existing common shareholders, for every share of common stock, which you would continue to keep, you would reserve some number of shares of preferred stock, which would pay a dividend and be capitalized effectively at a better valuation.

"There is a huge need these days for steady, high-quality income, and what balance sheet would be safer to effectively have income coming from it than Apple's? We think a preferred would only need to yield 4% on a perpetual basis. There would be no maturity, no refinancing risk, no default risk. It does not put the company at risk. It is not financial leverage in the sense that debt would ordinarily be considered to be. Yet shareholders would be able to have value. We calculated for every $50 billion of preferred that Apple issues, it would effectively unlock $32 per share in value. We think they can actually issue to existing shareholders several hundred million dollars of value, therefore unlocking several hundreds of dollars of value per share."

On whether Apple has had the right to be unreasonable for years due to the company's success:

"I do not think Apple will grow 80% or 100% year over year like it has, unless they come up with another brilliant product, which I would not rule out of the question. But as things are right now the growth has slowed some down. their success as a business has far exceeded their success as a stock, even though the stock has been phenomenal. the reason I think has to do with the capital allocation policy."

On whether he buys the argument that so much of Apple's cash is sitting overseas:

"I am glad you brought that up because that is another benefit of what I am suggesting that I have not had an opportunity to explain. To issue preferreds, they get to keep their cash. They do not have to repatriate it, pay tax on it. They can use it for whatever they are doing. If they are waiting around for a tax holiday, they can still do that and shareholders can get the benefit of that value, because the future preferred shareholders can look to that cash as a source of future dividend payments. For example if the annual dividend was $20 billion, $500 per share, more than all the value of Apple stock—you could look at the balance sheet today and know there are seven years of dividend payments just sitting there waiting to be paid."

On whether he is being more charitable to Apple than he needs to be:

"I think there is an opportunity here. Steve is not with us anymore, and that is negative in many ways, but it is positive because Apple doesn't have to be committed to that way of thinking at this point in time. That there are new people and new ideas.

"This is an opportunity for shareholders because we have a vote. Do you want to eliminate the ability to have preferred in the future, or do you want to have preferred possibility in the future? If I can convince the shareholders to unify themselves and say—look, there are a million ways to do this, to skin this thing. but if we can unify the shareholders to send a clear message to Apple and say please unlock this value, this is a great way to do it, even if there are other ways to do it, let's unify on this, vote down this Proposal 2, I think that is a message the board will have to hear loud and clear, and I expect they would act on it if there is sufficient shareholder support for voting against Proposal No. 2."

On why Apple is so insensitive to shareholder concerns:

"I think you have shareholders telling everybody different things and you have the legacy. Some want to increase the dividend, do the buyback. You repatriate, do this, that, or the next thing. It is hard for anybody to get through that noise. Our idea here is to take a proposal, I think it is the best proposal. Other people might think there is another proposal. Let's get a large critical mass of institutional and individual shareholders to send a message to Apple's board, and they will either listen to it or will not listen to it. if they do not, we can take that up later."

On whether there are other institutions willing to join him in the fight:

"I expect that they will. I have actually [heard from some this morning]."

On whether he would change his view of Apple and say 'I don't want to be long Apple—I'm out' if Apple says beat it:

"The first step is to get all of the shareholders to send Apple a message, to send the board a message. Let’s bring that message to the board and see if it acts on that message, and then we can take it from there."

On whether Apple is still one of his best ideas:

"Yes. Apple is the largest position in our fund."

On why it takes Greenlight Capital to highlight this issue and why no one else has spoken out:

"It is a unique situation, a unique opportunity. Our solution is novel. We thought of it ourselves.

"I do not expect this to be all that contentious. I think there's very little harm in allowing Apple to continue having the ability to issue preferred. Even if you do not like this particular idea, let them have the flexibility to do it in the future. I think this came out some kind of a corporate governance review, and this gives us an opportunity. I am taking this opportunity to take the idea forward in a very public way, to educate and discuss with the other large shareholders what can be done."

On Apple's reaction:

"The call I had with them yesterday was very friendly, a very good tone of voice. I had a nice conversation with Tim [Cook] on this topic. He said he wants to review this proposal, wants me to meet with him and their advisers and they want to evaluate it fresh. I think they will look at it with a much better, clearer mind now than they did last year. And I think that further input from shareholders will get this thing some momentum."

On whether shareholders have been too trusting of Apple:

"I think the company has done a phenomenal job. It is a phenomenal company. The way they have grown revenues, products, their brand is absolutely remarkable. It is probably nearly unparalleled. There is a lot of reason to have that kind of trust."

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