Investor sues Apple, wants more cash

Friday 08 February 2013 18.58
Greenlight Capital's David Einhorn suing Apple on $137 billion cash pile
Greenlight Capital's David Einhorn suing Apple on $137 billion cash pile

With its annual meeting looming and its stock on the decline, Apple is facing a rebellion from an influential investor who wants the company to stop stockpiling cash and give it to shareholders instead.

Greenlight Capital said yesterday that it is suing Apple in a New York federal court over the company's proposal to make it more difficult for it to issue preferred stock.

David Einhorn, who heads the investment fund, said the proposal would close down one avenue for Apple to reward shareholders with more cash.

Apple is still the world's most valuable company, but its stock has lost 35% of its value since September, as it has become obvious that its once-rapid growth has slowed down.

The company is still fabulously profitable, and Wall Street wants it to share more of that money with its shareholders rather than tucking it away in low-yielding bank accounts.

"Apple has $145 per share of cash on its balance sheet. As a shareholder, this is your money," Einhorn said in a letter to the company. He has a history of criticising companies publicly, often after shorting their stocks.

In a statement, Apple said its management and board continue "active discussions" about what to do with the money, and it will take Einhorn's proposal into consideration.

Its $137 billion in cash makes up nearly a third of Apple's stock market value. Companies normally do not hoard cash the way Apple does.

They keep enough on hand for immediate needs, and either invest the rest in their operations or hand it out to shareholders in the form of dividends or stock buybacks. If they need more cash for, say, an acquisition, they borrow it.

Einhorn told CNBC yesterday that Apple was acting like his grandmother "Roz," who grew up during the Great Depression. People who have experienced financial trauma, he said "sometimes feel like they can never have enough cash."

Einhorn's criticism hints at Apple's lean years in the mid-90s. Former chief executive Steve Jobs came out of that experience with a very tight hold on the company's purse strings. Apple has never explained its reasons for hoarding the cash other than to say it is preserving its options.

Since his death in October 2011, Apple has begun paying a quarterly dividend of $2.65 per share and started to repurchase some of its shares.

Wall Street did not complain much about Apple's hoarding policies until its revenue growth started slowing. In the recent Christmas quarter, Apple's revenue rose 18% from a year ago -- a very good figure for a company of its size, but a far cry from the 50%-plus increases it has often posted since the 2007 launch of the first iPhone.

Apple has not launched a new ground-breaking product since the iPad in 2010, so the company is forced to expand the appeal of its current products to achieve growth.

The slowing growth has scared away investors who focus on fast-growing companies, and the relatively small dividend means the company does not get much respect from investors who look for regular income, analysts say.

Greenlight, a shareholder since 2010 with 1.3 million Apple shares worth nearly $600m, wants Apple to create a class of preferred stock that carries a higher dividend, and give it away to current shareholders. That way, Einhorn believes the company would appeal to value investors and those who are risk-averse.

Einhorn said his firm has been talking to Apple over the past several months about the creation of the new share class. Apple, he said, rejected the idea in September.

The company does not currently issue preferred stock. At its annual meeting on February 27, it plans to ask shareholders to approve a measure that would force the board to get shareholder approval before issuing preferred shares.

Apple said in its proxy statement filed with the Securities and Exchange Commission that its board does not plan to issue preferred stock in the future and believes it is "appropriate" to eliminate the possibility from its charter.

Greenlight urges Apple shareholders to vote against the proposal. In the lawsuit, it claims that the proposal bundles three distinct proposals that the SEC requires to be separated so shareholders can vote on each one.

In its statement, Apple said that even if the proposal passes, it could still adopt Greenlight's concept and issue preferred stock.

Apple has at least one major shareholder on its side. The California Public Employees' Retirement System, the country's largest pension fund, said in an SEC filing earlier this week that it will vote for Apple's proposal, which would also let shareholders vote against directors. CalPERS owns 2.7 million Apple shares, nearly three times as many as Greenlight.