On Friday in a rare nod to the “little guy” a judge voted in hedge fund manager David Einhorn’s favor as it ordered Apple Inc. (NASDAQ:AAPL) to stop getting shareholder votes for proposal to amend portions of its corporate charter.
This comes as Einhorn’s firm, Greenlight Capital, sued Apple Inc. (NASDAQ:AAPL) in Manhattan’s federal district court on Feb. 7. The firm wants to unlock money from Apple’s $137 billion in shareholders’ cash.
Einhorn’s lawsuit has challenged Proposal No. 2, an Apple Inc. (NASDAQ:AAPL) initiative that would get rid of its power to issue preferred shares without a shareholder vote. The hedge fund manager argued that the company should issue the stock with a recurring 4 percent dividend and that Apple improperly combined the preferred shares item along two independent matters into a sole proxy proposal.
Referred to as “bundling,” Einhorn’s lawyers argued this has violated U.S. Securities and Exchange Commission securities laws.
In Friday’s ruling, U.S. District Judge Richard Sullivan granted Greenlight Capital’s motion for a preliminary injunction that would stop the vote on it. It had been scheduled for February 27 at Apple’s annual stockholders’ meeting.
Sullivan added on Friday that Greenlight and another investor who had sued Apple “are likely to succeed on the merits and face irreparable harm if the vote on Proposal No. 2 is permitted to proceed.”
For Apple Inc. (NASDAQ:AAPL), it has argued that the entire plan is in fact shareholder-friendly and prominent investors such as the California Public Employees Retirement System have supported it.
Friday’s court decisions follows Einhorn’s conference call from Thursday. He discussed some different ideas to unlock shareholder value. He believes that Apple Inc. (NASDAQ:AAPL)’s capital allocation policies are poor and he spoke about different ways to utilize preferred shares, including the creation of a security Einhorn termed as “iPrefs.”
Here’s a few nuggets from the call:
Now, consider the cost of that inventory. Apple Inc. (NASDAQ:AAPL)’s balance sheet is all equity. This means that both the business and the growing cash pile are entirely supported by high-cost equity capital. Assuming a 10% cost of equity, the opportunity cost of the trapped buying cash is $9.4 billion per year and growing. The opportunity cost of the domestic cash is an additional $4.3 billion.
Combined, that is more than $14 per share in earnings per share. Apple Inc. (NASDAQ:AAPL) can unlock value by either deploying the cash productively, returning the cash to shareholders or lowering the cost of capital that is supporting the cash pile. Apple has a number of ways it can return cash to shareholders. That’s look at for conventional alternatives. A one-time special distribution of excess cash, one-time stock repurchase using excess cash, a plan to use future cash to repurchase stock in the future, and an increase in the common dividend. Of course, I could do a combination of more than one of these, but for today’s print this, let’s look at them as separate options. To do a one-time dividend or a large one-time share repurchase, it’s good to know how much cash is available.
Apple Inc. (NASDAQ:AAPL) currently has $137 billion in cash, $94 billion of which is offshore. In these scenarios we assume Apple brands all its cash back to the US and pays the taxes for repatriating the funds. With $94 billion in foreign cash, taxed at 35%, there is $61 billion of cash on home. As the existing $43 billion of domestic cash for a total of $104 billion available. Please note that we are not advocating that Apple repatriated foreign cash. It affects, our proposal later on will show Apple does not need to do this. Obviously, Apple isn’t going to deplete it’s cash reserves 20, so we made some assumption about a large cash reserve.
We sought to pick a number that we thought would be more than sufficient for a rainy day fund. We took 1 year’s worth of operating expense and CapEx, less depreciation and came up with $20 billion. This, along with its ongoing franchise, should leave Apple well-positioned to execute its business plan, including acquisitions. While some have suggested that Apple Inc. (NASDAQ:AAPL) could raise additional cash by selling debt, we believe that Apple is highly debt averse work even asking it to reduce the cash balance to $20 billion is probably not realistic. But, where the sake of this e xample, we believe it is a reasonable number. That leaves 80 fair $4 billion of free cash to use for a one-time dividend or a one-time self tender offer of its shares. A one-time dividend of the $84 billion in cash would come out to $89 per share of Apple common stock. Figure out how much value this would unlock, one has to guess how much credit the market is already giving Apple Inc. (NASDAQ:AAPL) for the cash. If the market gives it no credit, than the dividend is found value which means the dividend would unlock the whole $89 per share. However, to the extent the market already gives Apple some credit for the cash, the amount unlocked would be reduced. There’s no way to know for sure how much credit market gives. So, there’s no way to know how much value will be unlocked, but the range is no less than zero and no more than $89 per share. The caveat is, that to the extent this would reflect Apple adopting a better capital allocation policy, such that cash and future cash aren’t trapped indefinitely, the market might reward Apple with a higher PE ratio.
We have two thoughts in this regard. First, if the change in capital allocation is done begrudgingly, the market will be less likely to give credit or recurring improvement. We think we saw that with Microsoft Corporation (NASDAQ:MSFT)’s large special dividend a few years ago. Second, the benefit from a higher PE due to a more shareholder friendly attitude is available to Apple Inc. (NASDAQ:AAPL) in each of the scenarios we will review today. As we prepare scenarios, you can build and whatever multiple expansion you think is right for more shareholder friendly capital allocation and apply it to each scenario. The only scenario that won’t approve the market sentiment on Apple Inc. (NASDAQ:AAPL) is, of course, the status q uo. Let’s look at the second option. The one-time $84 billion share repurchase.