One of the more high-profile instances of an activist investor pushing for change was when Carl Icahn put the pressure on Apple (NASDAQ: AAPL) . The billionaire head of Icahn Enterprises successfully pushed Appleto boost its share repurchase program to return capital to investors.
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In this clip fromIndustry Focus: Tech, Motley Fool analystsDylan Lewis and Evan Niu, CFA, discuss how Icahn got what he wanted.
A full transcript follows the video.
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This podcast was recorded on Oct. 21, 2016.
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Dylan Lewis: I think “distraction” cues us up perfectly for a discussion on some cons for activist investors. Whenyou said distraction, the first thing that came to mind for me wasCarl Icahn andApple. Itseemed like, when he had a stake in that company,every two months we were seeing a new valuation.
Evan Niu:And a new letter.
Lewis:“I think shares are worth $900!” It was just every day in the news,that’s what they were talking about. That becomes kind of a nuisance for management.
Niu:It is. I think, in Icahn’s case,he’s kind of a ruthless activist investor. He had a big position, and of course, a big position in Apple means 2% or 3% of the company.
Lewis:Yeah,I think he was just under 1%.
Niu:Yeah, it’s single digits. There’sno way that anyone is buying 10% of Apple.
Lewis:Which is tens of billions of dollars, for that position.
Niu:Yeah,no one has the money for that. I think, in Apple’s case,the specific thing that he was gunning after, which was this really big push for capital returns …
Niu:Right,buybacks and dividends.I think that was a very valid cause,because Apple had been getting criticized for yearsabout that. Their cash position had grownridiculously large,unjustifiably. You can’t justify having that much cash. Again,as a public investor, you’re just sitting there, and you’re like, “Guys,come on, you have way too much cash.” But a public investor can’t do anything about it. That’s not to say that Apple doesn’t know better. I think Apple was justbeing stingy at the time, choosing to do that. They had already started a buyback program, but Icahn came in here andreally pushed them to make it biggerandreally meaningful. Of course, they didn’tlisten to exactly what he said. But I think he was successful atgetting them to increase it,in which case, it’s definitely a good thing for investors, because otherwise, investors have no recourseto get Apple to start giving backall this money that’s just idly on the balance sheetdoing nothing, earning really crappy returns.
Lewis:Andhis pitch was basically, “Shares arecriminally undervaluedand you have all this cash. You should be buying back shares.”I think the number that he threw out there was a $150 billionshare-repurchase program.
Niu:Something like that.
Lewis:We’ve seen,in the last couple years,I think he began his position in 2013 and exited in 2015, he had about a two-year holding period. During that time, we saw thecompany acquiesce to that a little bit, and decide, “We’regoing to be buying back shares at a pretty significant clip.” Itobviously wasn’t to the extreme that he’d been hoping for.
Niu:I think,right now, they have bought back about $120 billion, so far, total. Whichis a pretty crazy numberin itself. That’s a megacap company. They just bought back a megacap company. But, I think,in the example of this cash thing specifically,having too much cash really does affectsome of your financial metrics, too. Think about,for example, return on assets. If you have all this cash justsitting out there, and your asset number is humongous …
Lewis:Andyou’re not returning anything on that.
Niu:Right, andyou’re not giving back to shareholders, then your net income ratio to your assets is now smaller. So, your return on assets, return on equity,all these important financial metrics thatinvestors look at to judge theperformance of the company are now being artificially deflatedbecause you have a ridiculous amount of cash, and that cash is not doing anything. So, there are a lot ofmeaningful ways this impacts things. Beyond,when they start to buy back,then you get earnings creation. I think he did a good job in terms of really getting them to do something that needed to be done that was holding them back.
Dylan Lewis owns shares of Apple. Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.