Counterparties: How do you value $137 billion?

February 7, 2013

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:

Right On
“And now let us praise, and consider the absurd luck of famous men” – Alexis Madrigal

China
Chinese accounting scandals are so simple they’re almost brilliant – Quartz

Ouch
So God made a banker – MarketWatch

JPMorgan
Lawsuit docs say JPMorgan ignored quality controls on mortgages (just like everyone else) – Dealbook

Takedowns
The latest attempt defend TBTF “is not credible and should not be taken seriously” – Simon Johnson

Popular Myths
While CEOs complained about ‘uncertainty’, hiring, capital spending, and sales rose – Caroline Baum
The day the uncertainty myth died – Joe Weisenthal

Wonks
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

Euphemisms
“Long European vacation” – Gothamist

Self-Awareness
White dude declares racism over in tech – Nitasha Tiku

Sad
“Some people go to school to learn… I went to get a job” – Kevin Roose

Alpha
“Around half of surveyed investors weren’t even aware the market had gone up each year post-crisis” – Business Insider

Compelling
The environmental benefits of working fewer hours – Matt Yglesias

Comments
6 comments so far

Apple should hire some decent investment managers to get a better return on their horde.

Posted by Corpgov.net | Report as abusive

Can someone explain how this isn’t a cut-and-dry case of where the IRS should be pursuing an application of the Accumulated Earnings Tax? While not talked about that often, there is already a tax on the books that is designed to prevent corporations from hoarding cash and withholding dividends beyond what they could reasonably use in their operations. There is a lot of latitude in how that is defined since acquisitions can use a lot of cash so it doesn’t come up much but it is realtively inconceivable that Apple could ever use its whole cash hoard. For one thing, even if it wanted to go on an acquisition spree it would seem unlikely that the antitrust regulators would let it buy another tech company that large. Einhorn should enlist the IRS as his ally and Apple should dividend that cash!

Posted by TGDC | Report as abusive

The Accumulated Earnings Tax applies to taxable income, a large part of the cash hoard is foreign earnings not repatriated and not taxabe as long as they are not repatriated.

Posted by alea | Report as abusive

@ alea,

I would be totally unsurprised if the IRS sent them an audit notice along EXACTLY the lines TGDC suggests. While it has never happened that I can remember it would happen to Apple first as they currently have the most dough in the corporate freezer.

“To Mr. Tim Cook,

If you’re not using that big pile of cash pronto please be a dear and do send us some. Sincerely Barack & Michelle.”

Posted by y2kurtus | Report as abusive

Gee, I’ve been predicting a leveraged buy out of Apple for over a year now. I think Apple will defend itself this time, but the opportunity to liquidate the company is too great. I’m expecting a serious buy out offer funded by Apple cash flow and its cash hoard. Minority share holders will be shafted in due course.

Posted by Kaleberg | Report as abusive

Lang Ping said yesterday: “I feel very proud, and have the determination and confidence to do)Shenyang Zhongze football team set sail marshal Li Jinyu as coach the reporter learned yesterday, Liaoning Zhongze group recently completed the acquisition of Shenyang Shenbei Football Club 100% equity

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/