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Apple Puts Carl Icahn's $150 Billion Buyback Proposal To Shareholders

54 points by kirtijthorat 13y ago

sbarre 13y ago
The article talks about one of the risks being a "value-destroying takeover". Is there anyone or anything out there that could even try this with Apple? Is that even really a risk for them? It would seem in their market that any competitor or threat to their business would be spotted miles and years away..
- Fomite 13y ago
  They're concerned about Apple taking something over, not Apple being taken over. With a massive cash reserve, it becomes easier to buy up interesting new companies, and something like 80% of these destroy value.
  - johansch 13y ago
    That last bit sounds quite interesting. Is there some data on this somewhere?
    - Fomite 13y ago
      Don't have data on hand (it's not my field, I was discussing M&A with a finance type) but this looks like a potentially interesting take: http://www2.warwick.ac.uk/fac/soc/wbs/subjects/accountinggroup/eventsandseminars/richard_taffler_paper.pdf http://www2.warwick.ac.uk/fac/soc/wbs/subjects/accountinggro...
  - gress 13y ago
    A concern notably not grounded in any evidence about how actually Apple operates.
    - nitrogen 13y ago
      FingerWorks and PrimeSense are both examples of Apple buying technology companies. FingerWorks stopped shipments when Apple bought them, limiting FingerWorks technology only to Apple products. We've yet to see what they do to PrimeSense.
      - gress 13y ago
        This precisely supports the point that Apple carefully avoids the kind of value destroying acquisitions, that shareholders might need to be concerned about. In the case of fingerworks, it would seem to have been a fantastic act of value amplification for Apple.
        smackfu 13y ago
        Well, you turn a company that can sell to anyone in the industry and make a profit, into one that can only sell to one customer and makes zero profit. The former is generally going to be valued higher than the latter.
        gress 13y ago
        This makes no sense. The companies Apple acquires are not turned into anything. The personnel and technology are absorbed and deployed in the creation of future products, many of which are the most popular in the world. Value is magnified - not destroyed.
        smackfu 13y ago
        The question is whether the total value the company adds to Apple is greater than the total value that company would have had over its lifetime if not acquired. That doesn't mean it's a bad move for Apple to make the acquisition, but it may "destroy value" in the process.
        gress 13y ago
  - sbarre 13y ago
    Ahh.. cool, thanks for the clarification
JumpCrisscross 13y ago
Apple's operations, net of capital investment, generate north of $40 billion a year in cash flow. The $146 billion cash pile it declared in its last 10-K [1] earned a 1.03% weighted return. This is the motivation for returning cash - shareholders can likely earn more than what Apple is earning on its cash. But $111.3 billion of that $146 billion is held overseas. Repatriating it is expensive - around 40% of the amount. The present dividend programme costs $35 billion annually. This effectively consumes the U.S. cash pile and cash flows. Anything more would require borrowing. Why borrow? The bet is that the interest paid on the borrowing is less than the gap between what investors could earn on their cash (~6.45% long-run S&P 500 return less a risk premium) and what Apple presently earns (~1%). >Spending down a cash pile is one thing, gearing up to finance one something of a different question. This doesn't make sense - borrowing to repatriate cash isn't "gearing up to finance [a cash pile]." The cash is there, it's just overseas. If push came to shove it could be used to extinguish the debt through some other anti-tax vehicle or by taking the I-didn't-plan-sufficiently penalty. [1] http://www.sec.gov/Archives/edgar/data/320193/000119312513416534/d590790d10k.htm http://www.sec.gov/Archives/edgar/data/320193/00011931251341...
- kirtijthorat 13y ago
  So how are they putting proposal to buyback shares worth of $150B when Apple only has $146 cash pile? Pull everything from the overseas or just borrow from another financial institute? If they opt for borrowing route then is this a good thing or a bad thing for investors? I mean long-term investors. Just curious.
  - JumpCrisscross 13y ago
    The $150 billion figure is misleading - it is the sum of the $100 billion to be returned through December 2015 ($33.5 billion in 2013) and the $50 billion being proposed to be returned to shareholders in fiscal year 2014. Thus, 2014 dividends and share repurchases would be, if the measure passed, about $84 billion. This would come out of the $146 billion cash pile plus the cash Apple would add to the pile in FY 2014. If (a) the rate at which Apple can borrow to repatriate this cash plus (b) the rate Apple expects to earn on its cash is less than (c) the return investors expect they could generate on their cash, i.e. if (a) + (b) < (c), then yes, it makes sense to borrow to return cash to shareholders. Borrowing, in this case, is a transaction cost for skirting U.S. tax law.

54 points by kirtijthorat 13y ago

The article talks about one of the risks being a "value-destroying takeover". Is there anyone or anything out there that could even try this with Apple? Is that even really a risk for them? It would seem in their market that any competitor or threat to their business would be spotted miles and years away..

Fomite 13y ago
They're concerned about Apple taking something over, not Apple being taken over. With a massive cash reserve, it becomes easier to buy up interesting new companies, and something like 80% of these destroy value.
- johansch 13y ago
  That last bit sounds quite interesting. Is there some data on this somewhere?
  - Fomite 13y ago
    Don't have data on hand (it's not my field, I was discussing M&A with a finance type) but this looks like a potentially interesting take: http://www2.warwick.ac.uk/fac/soc/wbs/subjects/accountinggroup/eventsandseminars/richard_taffler_paper.pdf http://www2.warwick.ac.uk/fac/soc/wbs/subjects/accountinggro...
- gress 13y ago
  A concern notably not grounded in any evidence about how actually Apple operates.
  - nitrogen 13y ago
    FingerWorks and PrimeSense are both examples of Apple buying technology companies. FingerWorks stopped shipments when Apple bought them, limiting FingerWorks technology only to Apple products. We've yet to see what they do to PrimeSense.
    - gress 13y ago
      This precisely supports the point that Apple carefully avoids the kind of value destroying acquisitions, that shareholders might need to be concerned about. In the case of fingerworks, it would seem to have been a fantastic act of value amplification for Apple.
      - smackfu 13y ago
        Well, you turn a company that can sell to anyone in the industry and make a profit, into one that can only sell to one customer and makes zero profit. The former is generally going to be valued higher than the latter.
        gress 13y ago
        This makes no sense. The companies Apple acquires are not turned into anything. The personnel and technology are absorbed and deployed in the creation of future products, many of which are the most popular in the world. Value is magnified - not destroyed.
        smackfu 13y ago
        The question is whether the total value the company adds to Apple is greater than the total value that company would have had over its lifetime if not acquired. That doesn't mean it's a bad move for Apple to make the acquisition, but it may "destroy value" in the process.
        gress 13y ago
- sbarre 13y ago
  Ahh.. cool, thanks for the clarification

JumpCrisscross 13y ago

Apple's operations, net of capital investment, generate north of $40 billion a year in cash flow. The $146 billion cash pile it declared in its last 10-K [1] earned a 1.03% weighted return. This is the motivation for returning cash - shareholders can likely earn more than what Apple is earning on its cash. But $111.3 billion of that $146 billion is held overseas. Repatriating it is expensive - around 40% of the amount. The present dividend programme costs $35 billion annually. This effectively consumes the U.S. cash pile and cash flows. Anything more would require borrowing. Why borrow? The bet is that the interest paid on the borrowing is less than the gap between what investors could earn on their cash (~6.45% long-run S&P 500 return less a risk premium) and what Apple presently earns (~1%). >Spending down a cash pile is one thing, gearing up to finance one something of a different question. This doesn't make sense - borrowing to repatriate cash isn't "gearing up to finance [a cash pile]." The cash is there, it's just overseas. If push came to shove it could be used to extinguish the debt through some other anti-tax vehicle or by taking the I-didn't-plan-sufficiently penalty. [1] http://www.sec.gov/Archives/edgar/data/320193/000119312513416534/d590790d10k.htm http://www.sec.gov/Archives/edgar/data/320193/00011931251341...

kirtijthorat 13y ago
So how are they putting proposal to buyback shares worth of $150B when Apple only has $146 cash pile? Pull everything from the overseas or just borrow from another financial institute? If they opt for borrowing route then is this a good thing or a bad thing for investors? I mean long-term investors. Just curious.
- JumpCrisscross 13y ago
  The $150 billion figure is misleading - it is the sum of the $100 billion to be returned through December 2015 ($33.5 billion in 2013) and the $50 billion being proposed to be returned to shareholders in fiscal year 2014. Thus, 2014 dividends and share repurchases would be, if the measure passed, about $84 billion. This would come out of the $146 billion cash pile plus the cash Apple would add to the pile in FY 2014. If (a) the rate at which Apple can borrow to repatriate this cash plus (b) the rate Apple expects to earn on its cash is less than (c) the return investors expect they could generate on their cash, i.e. if (a) + (b) < (c), then yes, it makes sense to borrow to return cash to shareholders. Borrowing, in this case, is a transaction cost for skirting U.S. tax law.