Counterparties: How do you value $137 billion?
Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.
What do you do with $137 billion? That’s actually a serious question. David Einhorn is technically suing Apple over its voting rules — here’s the full complaint — but his real target is its ungodly cash hoard. What he ultimately wants is simple: Apple’s money. (His hedge fund owns more than $590 million in Apple shares.)
Apple’s long been criticized for sitting on its money. Its cash pile, the WSJ notes, is bigger than the market cap of all but 17 companies in the S&P 500. Apple announced a dividend plan last year, but Einhorn’s not satisfied. He’s been making the media rounds today, finding an upside to Steve Jobs’ death and comparing the company that invented the iPhone and iPad to a timid old lady. Here he is on CNBC:
People who’ve gone through traumas… they sometimes feel like they can never have enough cash. I remember my Grandma… she was a Depression-era woman from her childhood, and she wouldn’t even leave me a message on my answering machine because she didn’t want to get charged for the phone call.
To Einhorn, Apple is badly undervalued and he just wants to help “unlock the value” of Apple’s balance sheet, which is a hedge fund-y euphemism for “pay me”. To do this, he wants Apple to issue a new class of “high-yielding, tax efficient preferred stock to existing shareholders at no cost” that pays 4% per year (Apple’s common stock would still exist and trade separately). According to Einhorn, the new shares would let Apple keep most of its cash hoard, and would boost its stock price by attracting “more value-oriented investors” — like, presumably, himself.
Why isn’t Einhorn angling for Apple to do something more traditional like boost its dividend or buy back shares? The WSJ spoke to James Angel, a Georgetown professor, who said it may boil down to taxes. Apple would likely take a big tax hit if it had to bring back its estimated $120 billion in overseas cash back to the states through a dividend or buyback; in fact, Einhorn mentions this in his filings. Create a new class of stock, avoid new taxes, and pay shareholders. Presto chango, $30 billion in value created!
Henry Blodget called all of this “financial engineering” and then something amazing happened: he and Einhorn got into an email debate over the theoretical value of money. Einhorn thinks the market is undervaluing Apple’s cash pile and that it should be getting a better return than, say, the 0.77% it earned in fiscal 2011. To Einhorn, Apple’s value should be based on how much all of that cash should be earning.
To Blodget, cash is cash: “Apple is the single-most-scrutinized public company in the world, and I think the market is, in aggregate, very much aware of how much cash Apple has”. He also wondered why wouldn’t every company simply introduce a preferred/common stock structure and boost its value? Jim Cramer wasn’t as clear about Einhorn’s plan: “What the heck is he talking about?”. Ironically, Cramer was the one who sounded like the voice of reason on Apple’s future: “I want growth, I’m sorry, I’m a traditional investor.” — Ryan McCarthy
On to today’s links:
The .03% solution to raise $350 billion in ten years – Jesse Eisinger
We’ve badly underestimated just how helpful fiscal policy can be - Econobrowser
Great, we’re not in a “post-growth” world – Ashok Mody