A Master Negotiator
When you negotiate for something you want, you should always ask for what you believe its the maximum you could possibly get. Icahn knows this very well. In his recent fight for Dell's (NASDAQ:DELL) control he also promised years of litigation and the fight met its end when the group that was looking to take Dell private - led by the company's founder, Michael Dell – increased its offer by $0.23. Long story short, thanks to the activist investor's outrageous claims, all shareholders benefited. Hence, its tough to understand how is it that many shareholders at Apple have recently criticized Icahn for asking for what is not only doable but also reasonable.
In Apple's case, Icahn has shown the company’s two year plan to return $100 billion to investors was inadequate. Indeed, Apple owns a $147 billion cash pile and its expected to generate a Free Cash Flow (FCF) of $100 billion during the next two years. Hence, its clear that giving back investors a “shy” $100 billion through dividends and buybacks seems inappropriate at a time when interest rates are still close to the zero bound level – when cash is cheap, its time to borrow. Above all, when the company does not plan to make any mega acquisition going forward.
Activism has been beneficial to all Apple's owners
Even when the head of corporate governance at Calpers, which is one of the biggest institutional investors at Apple, disagrees with Icahn and Einhorn, its an undeniable fact that all shareholders have benefited from activism. Not only the company may now agree to distribute an extra $50 billion through buybacks but also the shares are already trading much closer to their $575 52-week high.
Apple shares still look cheap when they trade at an ex-cash multiple 9.7 times 2014 earnings but, at the very least, they have bounced sharply from this year's minimum levels. I think there is much more activism coming on Apple's way and I also believe that all shareholders should support Icahn's new $50 billion proposal. The company's 2.2% cash dividend yield and its current buyback program still look low relatively to what the company could deliver. Above all when the company's growth story is just starting in huge emerging markets such as China or Latin America. Tim Cook might be doing a great job as Apple's CEO but he seems to be wrong regarding the management of the company's huge cash balance.
Despite its huge $500 billion market capitalization, Apple looks cheap and great investors have been trying to unlock value from the tech giant for years now. In a very well run organization such as Apple the easiest way to unlock value is to increase the company's return to shareholders. For the time being, Apple has agreed to increase its initial $45 billion return to shareholders up to $100 billion. Still, given the company's outstanding cash generation capabilities, this figure looks a bit shy from fair. I think an extra $50 billion return is coming and all shareholders should be supportive.