On CNBC this afternoon I mentioned that I hope Apple tells Carl Icahn to “stuff it.”
This startled some folks, so I figured I would explain this thinking in more detail.
First, the back-story…
Billionaire activist investor Carl Icahn has found a new target: Apple.
Icahn says he bought a billion dollars worth of Apple stock last month, and that he has already had a phone call and dinner with Apple CEO Tim Cook.
Over dinner, Icahn told CNBC’s Scott Wapner yesterday, Icahn discussed his demand that Apple spend $US150 billion buying back its own stock.
Things “got a little testy” at that dinner, Icahn added.
And no wonder.
Because Apple CEO Tim Cook has much better things to do than spend his evening hours getting lectured by Carl Icahn about the virtues of short-term financial engineering.
I’m generally a big fan of Carl Icahn. He’s a smart, tough, bold, talented activist investor. He has helped whip a lot of lame, mediocre companies into shape. He’s also very entertaining. The time he called into CNBC last year to rip into fellow billionaire Bill Ackman was probably the best half-hour in the history of financial television.
Carl Icahn might be right that, if Apple borrowed a hundred billion dollars and used it to buy back its stock, Apple’s stock price might rise, at least temporarily.
But as a fellow Apple shareholder, I hope that Apple doesn’t do that.
Instead, I hope Apple tells Carl Icahn to get lost.
Apple is one of the world’s greatest companies. And it has much better things to do than waste its time on short-term financial engineering moves just to please a grasshopper-like investor like Carl Icahn.
Apple has delivered extraordinary returns to its long-term shareholders over the past 15 years. It has done this by focusing on what it does best: Making great products that customers love. If Apple continues to make great products that customers love over the next 15 years, Apple’s long-term shareholders will do just fine.
And in the meantime, they’ll earn a nice, fat dividend.
If Apple did borrow ~$150 billion to buy back its own stock, meanwhile (it would have to borrow this money, because most of its own cash is located overseas and it can’t use it to buy back stock without paying huge taxes), then Carl Icahn would just dump it and move on.
Then Apple’s actual investors, like me, would be left with a company with a mountain of debt and less cash and flexibility during a challenging period for the industry and company. If Apple stumbled in its actual business — producing great products — its temporarily financially-engineered stock price might fall. Carl Icahn wouldn’t care, because he would be long gone. But Apple employees, customers, and investors like me would care. Because we would be stuck with a mountain of debt, a lack of cash, and a company that has a lot less flexibility.
In fairness to Carl Icahn, I do think that Apple should return more cash to shareholders. I think it should increase its dividend and divert more cash flow to buying back shares. Doing this would not reduce Apple’s flexibility or load it to the gills with debt. And it would make Apple stock an even more attractive investment.
But spending a few more billion a year on dividends and buybacks, and rewarding long-term shareholders with this cash is a whole different ballgame than borrowing $US150 billion to do a humongous one-shot buyback just to appease a loud and relatively small activist investor.
(Yes, Carl Icahn owns a billion dollars of Apple stock. So what. When your company is worth $US400 billion, a billion dollars amounts to a quarter of one per cent. A billion dollars of stock doesn’t even put Icahn in the top 20 Apple shareholders. Vanguard, Fidelity, Blackrock, Northern Trust, and dozens of other big institutional investors own a lot more Apple stock than Carl Icahn. So if Apple is going to listen to any shareholder demands, it should be theirs, not Carl Icahn’s.)
Over the past three decades, thanks to the professionalization of the money-management industry, U.S. corporations have gone from not giving a damn about shareholders (think the 1970s) to being way too in thrall to them (corporate profit margins are now at the highest level in history).
This obsession with maximizing short-term earnings and stock returns, instead of balancing the interests of shareholders with customers and employees, is warping and hurting the American economy. In an effort to appease short-term traders, companies are cutting investment in future products, firing dedicated people, and, in some cases, reducing product quality. This behaviour might temporarily add a couple of more points per year to the annual returns of Wall Street investors. But it’s hurting our economy and companies — and fellow Americans — over the long run.
Americans should be proud as hell of what Apple has accomplished. The company is a shining beacon of product-quality and success, and unlike many companies, it has also produced amazing returns for its shareholders. If Apple continues to focus on what really matters — making great products — Apple’s stock price will take care of itself. Just as it always has.
Short-term traders like Carl Icahn, however, don’t give a damn about Apple or its products. They care about getting a quick score.
If Carl Icahn had great product ideas for Apple, or great advice for telling Tim Cook how to resist the howls of short-term greed from Wall Street, then I, as an Apple investor, would welcome Carl Icahn’s involvement with the company.
But Carl Icahn doesn’t want to help Apple make great products. He doesn’t want to tell Tim Cook how to avoid getting sucked into the same short-term-greed game that has corrupted the decisions of many American executives. And he’s not willing to let the process of Apple making great products make Apple’s share price take care of itself.
Carl Icahn just wants a payoff.
So I hope Apple thanks Carl Icahn for his interest and, politely, tells him to shove off.
There are plenty of other companies Carl Icahn can hassle to produce big quick returns. He can start with BlackBerry, for example. Thanks to Apple, BlackBerry’s pretty much dead, anyway.
Here’s the CNBC segment: