In a tender offer, a company offers to purchase some or all of its investors' shares. Though tender offers usually come at a premium over the current share price, Icahn wants Apple to borrow money to make its offer at $525 per share, which is the level at which shares of AAPL are currently trading.
"We find it difficult to imagine the board would not move more aggressively to buy back stock immediately announcing a $150 billion tender offer." - Carl Icahn to Apple CEO Tim Cook.
In the letter, Icahn notes that his goal is not to criticize management, which he thinks has done a great job running the company. Instead, his issue lies with "the size and timeframe of Apple's buyback program."
He noted that Apple currently holds $147 billion of cash on its balance sheet, which is forecasted to generate $51 billion of EBIT -- or earnings before income tax -- next year. However, if you back out net cash, Apple currently trades at only 9x forward looking earnings, compared to an average of roughly 14x forward earnings for the companies that comprise the S&P 500. For Icahn, time is of the essence.
"With such an enormous valuation gap and such a massive amount of cash on the balance sheet," he wrote, "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)."
Icahn admitted that such a buyback would be "unprecedented" in size, he feels it would be appropriate because of the relative size and strength of Apple.
"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," he wrote.
"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."
Icahn used the letter to Cook as a promotional tool for his new website, debuting the note exclusively at "Shareholders' Square Table" Thursday morning. Interested parties must register an account and provide their email address to read the note, allowing Icahn to send out "timely information" on subjects he finds to be important.
"While there are many good CEOs and boards there are far too many ineffectual ones that are strangling shareholders and the economy," the investor's new website states.
Icahn now owns 4.7 million shares of AAPL, or nearly $2.5 billion.
In the letter, Icahn revealed he now owns 4.7 million shares of AAPL stock, up from a previous total of 4 million. That means he owns nearly $2.5 billion in shares of the iPhone maker.
Icahn first teased his letter to Cook via his official Twitter account on Wednesday, a day after the company unveiled its latest iPad lineup. For months now, Icahn has been attempting to persuade Apple to initiate a larger buyback of its own shares.
Apple is already in the process of spending $100 billion through 2015 on share buybacks, as well as dividend payouts. But Icahn believes Apple should increase its share buyback program and spend $150 billion on its share buyback.
The investor has a history of causing trouble with tech companies, most famously opposing Michael Dell's efforts to take PC maker Dell private. He also won three seats on the Yahoo Board of Directors, and is credited with helping to oust the CEO of Motorola, essentially forcing the company into the arms of Google.
Icahn's clout on Wall Street was enough to get him a private dinner in New York last month with Cook, as well as Apple Chief Financial Officer Peter Oppenheimer. Apple's executives did not comment on that meeting, but apparently did not accept Icahn's proposals, as the billionaire has continued his pursuit.
Icahn's letter is included in full below:
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.
Chairman, Icahn Enterprises (IEP)