Originally Posted by digitalclips
he'd be slaughtered in a vote.
Not necessarily. The largest shareholders are institutional investors. Now that Apple's mobile business is hitting the limits of the market along with their competitors, Apple has a fairly well determined value relative to other companies. The bigger investors want growth. Since it's much easier to determine the limits now, they are free to jump off at any point and reap the profits. I very much doubt Icahn's estimates but I think he's trying to persuade the larger shareholders:
"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."
$1250 in 3 years is a bit of a stretch IMO and I think he's flat out lying to other shareholders to get them to side with him. Apple is buying back shares so some increase would be expected but if they drop the outstanding shares from 900m to 700m with a $100b buyback, that puts the remaining shares at $690, nowhere near his estimates.
Apple has already done a buyback and it hasn't boosted the price all that much. Their cash is accounted for in the company valuation so spending it lowers their assets. Buybacks only work if they buy at a low price and they aren't at a low price, they are valued more highly than every company in the world and their earnings don't exceed every other company.
IMO, Icahn wants to persuade the largest shareholders to vote to increase the value of their holdings in a fast and predetermined way. If the proposal goes ahead, his holdings and the largest shareholders will go up by 1/3 and he will make over $800m in less than 3 years so he can go and loot some other company. You notice how he describes 3 years as 'longer term'. He's not in this for the long term as most people understand it.
Having said that, as long as Apple keeps bringing in the profits, the extra buyback wouldn't do much harm. If they do make another $150b in 3 years, spending the $150b they have now isn't going to make much difference. That is unless they are planning to use it for something big that they can't talk about like a buyout of a major company.
Imagine if they saved up $300b, bought Microsoft and dissolved their operations retaining patents - maybe less if Microsoft drops in value. Where would that leave PC users? Even with no growth, that's a market of 350 million units per year. They're not going to buy Linux systems and even if they did, Apple offers a better eco-system as it's controlled. Investors might initially be worried about blowing $300b but they'd sell hundreds of million of Macs. People need computers and without Microsoft, they'd have to choose from what remains and Apple would be the best option. Even if it's $600 machines Apple sells, it doesn't matter because they'd know they're selling loads of them. That would transform their Mac line into $50+ billion profit per year on top of the $50+ billion from iOS. They make their money back in another 3 years and own the computing world, finally getting rid of the problem of Windows being bundled with every PC. Now sure, there's Android but Android is no match for OS X on the desktop.