Carl Icahn urges Apple to make immediate tender offer for $150B in stock

Posted:
in AAPL Investors edited January 2014
In an open letter to Apple Chief Executive Tim Cook, billionaire investor Carl Icahn has pushed the company to issue an immediate tender offer for $150 billion in stock from shareholders at current market value.

Icahn


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.

Icahn


"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:
Dear Tim:

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.

Sincerely,

Carl Icahn
Chairman, Icahn Enterprises (IEP)
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Comments

  • Reply 1 of 74
    malaxmalax Posts: 1,598member
    Or instead of signing up for the square roundtable for exclusive access to this missive, we can read it in its entirety above (or skip over it as I did).

    WTF is that cartoon supposed to represent?
  • Reply 2 of 74
    jungmarkjungmark Posts: 6,645member
    Icahn to Apple: give me money for doing no work. I "saved" Moto.
  • Reply 3 of 74
    wozwozwozwoz Posts: 215member
    What a pointless waste of $150 billion in cash ... to just own more of yourself. Part of Apple's strength is its enormous cash hoard ... and the option and freedom to do as it pleases when the opportunity arises. Not to be squandered lightly.
  • Reply 4 of 74
    haarhaar Posts: 563member
    [COLOR=blue]G*D D**M is this guy the CEO of [COLOR=black]Apple[/COLOR] ?.... Carl you own one-half percent of [COLOR=black]Apple[/COLOR]... get lost, and earn some money!.... go fix [COLOR=red]Blackberry[/COLOR]!...[/COLOR]
  • Reply 5 of 74
    hydrhydr Posts: 146member
    Icahn got some great points. I hope Apples board listens, and issues a $150b tender offer at $525. Apple must invest in itself now, and reduce the share count by 30%. The $60b was a good start, now lets add another $150b. In a couple of years, Apples balance sheet will still hold more than $200 billion. Time to buy Apple, when Apple is clearly underpriced!
  • Reply 6 of 74

    Carl does what's best for Carl.

     

    ... but I smell a lawsuit coming up in the near future.

  • Reply 7 of 74
    aaarrrggghaaarrrgggh Posts: 1,569member
    Bad idea. Apple just needs to re-purchase sufficient shares to keep annual growth rates in earnings per share in-line with a random target. Reducing float by that much (by taking on debt and paying taxes you hope to eventually avoid) is simply stupid.

    Arguably what Apple should (and I think does) do is use their investment subsidiary to make strategic options bets for long-term share repurchase. Microsoft did this during the boom years, but I think more of it was for investment return than a goal of reducing float.

    I can see Apple wiping 10% of their float off the table each year, but 30% in one quarter serves no long-term investor-- or the company!
  • Reply 8 of 74
    mac_dogmac_dog Posts: 645member

    this guy needs to be taken down a notch. tim cook should take a lesson from steve's handbook and hand him his balls back on a platter.

     

    how about apple stockholders band together and take a full page ad out in the new york times or wall street journal and tell this clown to go **** himself. now that would be worth the price of either newspaper.

     

    [edit] so...now it's not okay to use the 'f' word on the web? what's next? mandatory skinny jeans?

     

    [2nd edit] american culture: what a bunch of pussies.

  • Reply 9 of 74
    Interesting, I didn't know about his role in the demise of TWA.

    http://www.investopedia.com/articles/financial-theory/08/carl-icahn-lift.asp
  • Reply 10 of 74
    I'd just like to know why Google doesn't have to do anything to make its stock rise to $1200 a share and yet Apple has to bribe everyone on Wall Street just to get to $600 a share. Larry Page is making Tim Cook look like an damn idiot. The way I figure, Apple will stay underpriced forever. No one can put any shareholder value into Apple because of the way the company is run strictly for profits. Google is practically giving everything away for free and that in turn is making the company wealthier by the day in Wall Street's standards.

    Apple needs to take that huge chunk of reserve cash and challenge Google's search engine business. Apple's mobile hardware business has been completely strangled by Android and now there are no revenue gains to be made because Android occupies 80% market share. Global consumers will no longer buy Apple products because Android products are far less expensive for consumers to buy. Apple needs to steal at least some of Google's search and ad click business to grab more revenue. If this current trend continues Google will easily pass Apple in market cap considering how fast Google's share price is rising. Apple is becoming an embarrassment to Apple shareholders as Google continues to biatch-slap Apple all over the place in value. Apple is just letting its cash hoard go to waste because right now it has zero value when it comes to shareholders.

    To hell with Icahn. He's just interested in making quick money for himself. I want Apple to expand it's business into non-hardware ventures and not let Wall Street gobble up it's money with buybacks. I'm fine with getting increased dividends because it might also interest mutual fund managers to invest in Apple. Apple stock is totally stagnant and there has to be some practical way to get it moving up again. If Google and Amazon can do it, so should Apple be able to find a way.
  • Reply 11 of 74
    Originally Posted by malax View Post

    WTF is that cartoon supposed to represent?

     

    If he really believes what he’s saying, he should die? :p 

  • Reply 12 of 74
    Constable Odo,

    If you believe either GOOG or AMZN are the better stocks, put your money where your mouth is.

    I wouldn't buy either.
  • Reply 13 of 74

    Since Apple is "publicly" traded, Cook et al cannot prevent bullies like him from buying into the company. But they sure don't need to listen to them or do what they ask, unless and until Icahn buys one share over 50%.

     

    Icahn is free to sell his shares of APPL at any time. 

    And he should.

    Please.

  • Reply 14 of 74
    nhtnht Posts: 4,388member
    Quote:

    Originally Posted by Constable Odo View Post



    Apple needs to take that huge chunk of reserve cash and challenge Google's search engine business. 

     

    The never worked out for Microsoft.

     

    Given Apple's track record in cloud services I'm guessing it wouldn't work out for them either.

  • Reply 15 of 74
    gqbgqb Posts: 1,934member
    Quote:
    Originally Posted by mac_dog View Post

     

    ...

     

    [edit] so...now it's not okay to use the 'f' word on the web? what's next? mandatory skinny jeans?

     

    [2nd edit] american culture: what a bunch of pussies.


    Or you could grow up.

  • Reply 16 of 74

    " My firm's success and my expertise as an investor would be difficult for anyone to argue."

    Of course, we know that you want to increase 1/2 percent share in the company to 1% without adding any more cash and do it immediately.

     

    "I hereby agree to withhold my shares from the proposed $150 Billion tender offer."

    Of course, as soon as the share price jumps,  you would be more than happy to take it off the table.

     

    "There is nothing short term about my intentions here."

    We know, your long term commitment is anywhere from 6-12 months.

     

    He has a point in technical terms and his objective is very clear.  As much as I want to believe that Apple has good plan to invest the money for strategic reasons, its hard to conceive why a company like Apple would need such a huge pile of cash. The fact that Cook and Oppenheimer met with him indicates to me that they are running out of ideas/opportunities to put that money to good use.

  • Reply 17 of 74
    nht wrote: »
    The never worked out for Microsoft.

    Given Apple's track record in cloud services I'm guessing it wouldn't work out for them either.

    Considering the largest reason for Google's recent mobile growth was Apple (that's right, iOS, not Google's own Android) should give the GOOG cheerleaders great pause.
  • Reply 18 of 74
    Buy all our shares at $750 then rebuild Apple .
  • Reply 19 of 74
    firhill07 wrote: »
    " My firm's success and my expertise as an investor would be difficult for anyone to argue."
    Of course, we know that you want to increase 1/2 percent share in the company to 1% without adding any more cash and do it immediately.

    "I hereby agree to withhold my shares from the proposed $150 Billion tender offer."
    Of course, as soon as the share price jumps,  you would be more than happy to take it off the table.

    "There is nothing short term about my intentions here."
    We know, your long term commitment is anywhere from 6-12 months.

    He has a point in technical terms and his objective is very clear.  As much as I want to believe that Apple has good plan to invest the money for strategic reasons, its hard to conceive why a company like Apple would need such a huge pile of cash. The fact that Cook and Oppenheimer met with him indicates to me that they are running out of ideas/opportunities to put that money to good use.

    There may come a time when Apple is able to manufacture at a significantly lower cost per unit (using manufacturing methods unknown today) and all of the profits will derive from simply using the device. An Apple product could become as essential as cash or credit to function in our society. At that point, Apple would be able to afford to give the product away.

    Until that time, it is far better to be rich than poor.
  • Reply 20 of 74

    Okay Timmy. How about a $150B stock buyback?

     

    Timmaaah?

     

    Come on . You are breaking my balls Timmy! You are breaking my balls. 

     

    Timmaaah !  Timmaaah Timmaah Timmah !

     

     

     

    Carl Icahn = Libbin a Lie !

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