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Carl Icahn urges $150B Apple buyback in letter to Tim Cook, increases investment to $2.5B

Carl-iCahn-shareholders-roundtable

Following an announcement yesterday from billionaire investor Carl Icahn that he had sent a letter to Apple CEO Tim Cook and would post the full letter online today, Icahn’s new website has now officially launched with the full text of the letter. In the letter on Icahn’s new website called the Shareholders’ Square Table, the investor urged Tim Cook to implement the $150 billion buyback plan that he has been suggesting since first announcing in August that he had taken a “large position” in Apple:

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. 

In the letter Icahn adds that if the proposed $150 billion buyback was executed immediately, Apple would experience “further stock appreciation of 140% for the shareholders who choose not to sell into the proposed tender offer.” Icahn also agrees to not participate in the buyback by withholding his shares to “ invalidate any possible criticism” regarding the long term benefits of the proposal.

Icahn also noted that he has increased the size of his position in AAPL from 3,875,063 shares to 4,730,739 shares, a value of around $2.5 billion, and that he intends to buy more.

While there isn’t a ton of new information regarding Icahn’s new website, it is already accepting sign ups and a description on the website explains it as “a platform from which we can unite and fight for our rights as shareholders and steer towards the goal of real corporate democracy.”

Icahn says that Cook will call him after the October 28th earnings announcement.

Icahn’s full letter to Tim Cook is 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

  1. Noooooooooo! The list of companies destroyed by Icahn for his personal enrichment is long and storied (TWA for example). More appropriate would be for Apple to buy back his shares and forever ban him from owning any Apple products.

  2. Gregory Wright - 10 years ago

    I don’t like this Icahn fellow…He’s like having a barrel of dead fish in the house.

  3. dwisehart - 10 years ago

    Let’s not attack the man: discuss his proposal instead. Saying that his idea is bad because you think he is a bad man is just as bad as saying that every idea that comes from a sports hero is good, just because who said it.

    The idea is simple: Apple’s stock is undervalued and the best use of $150B Apple can make is to buy its own stock, right now while it is cheap compared to what other companies are trading at. For any company there are a number of benefits to buying its own shares, beyond being able to buy those shares for a good price.

    From what I can see it is a good idea and I agree: Apple should be buying back more of its stock.

  4. bubffm - 10 years ago

    A proxy fight? With 0,5% ownership?? Give me a break! This guy is lost in translation. I don’t think any larger shareholders (and there are many much larger than this bloke) will support this cowboy.

  5. Josh Westmoreland - 10 years ago

    The world will be a far better place when Carl Icahn is rotting in his grave.

  6. Robert Dupuy - 10 years ago

    If he finds it difficult to imagine – then the problem is with his imagination.

    What got Apple here? Not stock buy backs – not dividends. What got Apple to this point – is innovation.

    $150 billion is a lot – but there are lots of nascent markets. Artificial Intelligence, Quantum Computer, commercial space travel – these things represent markets that dwarf Apple’s current market – and $150 billion isn’t even enough to get into all of these markets, Apple would still have to carefully choose its market and strategy.

    Obviously it’s been easier for Cook to imagine giving away $60 billion – then how to invest it properly.
    But do not continue down this path – it’s all about giving Icahn a little money today – and the heck with Apple.

    Long term, Apple is better suited continuing R&D an entering new, emerging markets in a big way.
    I’d vote for just giving Icahn a check for $3 billion and do nothing else he has to say.

    No, not literally – I wouldn’t give him a cent, but Apple would be better advised to just burn 3 billion dollars, then to follow this guy’s advice.

  7. Winski - 10 years ago

    Simple answer from Tim – “NO”.

  8. Ted Tschopp - 10 years ago

    Carl Ichan’s Ichan Enterprises has a market cap of 11.5 billion. Apple should buy them and sell them for parts just for wasting Cook’s time.

    http://www.google.com/finance?q=NASDAQ:IEP

  9. hisdudenessman - 10 years ago

    So this so-called business genius thinks it’s a good idea for Apple to spend everything single penny of money Apple has on hand plus borrow $3 billion just so their stock price can supposedly go up? Did he miss the part where Apple has $157 billion dollars of CASH just sitting in a big ass pile. They aren’t desperate. Who the fuck is this guy, man?

  10. Marklewood at Serenity Lodge - 10 years ago

    While I don’t pretend to know much at all about the markets, trading, or buying stocks, I do wish I had held on to my Apple stock which I sold at what was at the time a hefty 130.00 per share. But, wishing in hindsight will not help me. However, What Icahn proposes here seems nothing short of a “get rich scheme” — for HIM, not the rest of us poor folk. I like the way Apple is run. I like the futuristic outlook the company developed under Jobs and which it seems to be continuing under the present board and leadership. Jobs had a long-term vision that most likely has been kept under raps from any outsider — a closely guarded secret map for his beloved Apple. I doubt that Icahn is privileged to any such roadmap. Nor will his scheme buy him access. Tim Cook and board will most likely find a way to placate the greedy Icahn while protecting Apple from any short term or long term take-over scheme Icahn for which seems greedy. More than likely, such a scheme would end the company as we know it, in much the same predicament as TWA and other companies the man fleeced. No, I think not. As much as I do not know about such things, I do have a gut feeling that Icahn is out for only one thing — money in his pocket.

  11. johannwerner1860 - 9 years ago

    Why does 9to5Mac use flash. Now I have to find another apple news website.

Author

Avatar for Jordan Kahn Jordan Kahn

Jordan writes about all things Apple as Senior Editor of 9to5Mac, & contributes to 9to5Google, 9to5Toys, & Electrek.co. He also co-authors 9to5Mac’s Logic Pros series.