Carl Icahn raised his ‘no-brainer’ stake in Apple Inc. (NASDAQ:AAPL) to north of $3B and simultaneously turned up the decibel level on his demand that the iPhone maker boost its current buyback plans.
His carefully crafted tweets carried the message to the markets, shareholders and of course, the company.
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How much cash does Apple really need to hold?
Icahn fires off a number of broadsides at Apple Inc. (NASDAQ:AAPL) management in his letter to shareholders mentioned above, but most notably, Icahn proceeds to systematically debunk the company’s claim that it is unable to increase the scale of its buybacks due to the “dynamic competitive landscape” and because its “rapid pace of innovation require[s] unprecedented investment, flexibility and access to resources.”
Icahn’s response: “Apple is perhaps the most overcapitalized company in corporate history, from our perspective” considering the $130B net cash Apple held end-September 2013, plus the $40B expected to accrue in earnings over the next year.
“We believe that the combination of the company’s unprecedentedly enormous net cash balance, robust annual earnings, and tremendous borrowing capacity provide more than enough excess liquidity to afford both the use of cash for any necessary ongoing business-related investments in addition to the cash used for the increased share repurchases proposed.”
M&A? Not likely, says Icahn
Icahn also proceeds to brush off the likelihood that Apple Inc. (NASDAQ:AAPL) may need the cash for prospective M&A. “Apple clearly has a long history and culture of developing its innovation internally, which leads us to believe that the company will not seek out large acquisitions to pursue any of the opportunities about which we have speculated,” he asserts.
About internal R&D, Icahn says R&D expenditure is built into the consensus expectations of $40B of earnings next year.
Apple’s international cash and the tax on its repatriation
The argument that Apple Inc. (NASDAQ:AAPL) would suffer repatriation tax if cash held overseas is brought into the US to implement buybacks does not hold much water with Icahn. Though the tax implication cannot be denied, this is hardly a hurdle in boosting the buyback program – “We question why the company would not simply borrow the money in the Unites States to the extent it deems its domestic cash of $36 billion and domestic earnings are insufficient,” he says, arguing that “it is hard to find a better time in history to borrow money.”
Investment management: let us show you how
According to Icahn, Apple Inc. (NASDAQ:AAPL)’s board is devoid of any experts in the field of investment management – Apple’s stock therefore languishes at severely undervalued levels and the board is unable to see the need to boost buybacks to correct the situation.
“The S&P 500’s price to earnings multiple is 71% higher than Apple Inc. (NASDAQ:AAPL)’s, and if Apple were simply valued at the same multiple, its share price would be $840, which is 52% higher than its current price. This is a dramatic valuation disconnect that simply makes no sense to us, and it seems that the company agrees with us on this point,” says Icahn.
Icahn stresses that a buyback is an act of the company making an investment in itself. “The Board is doing a great disservice to its shareholders by not immediately increasing the size of the share repurchase program in order to more effectively take advantage of what we believe to be the company’s low market valuation.”