The Opinion Pages
Carl Icahn’s Bad Advice
should Tim Cook care what Carl Icahn thinks?
Earlier this month, Icahn, the famed “activist shareholder,” sent
a lengthy letter to the Apple
chief executive, which he also posted on the blogging platform Tumblr,
so that the rest of us could read it as well. Most of the time, when
Icahn takes a stake in a company, it is because the company is having
problems; his missives are usually less than pleasant.
that hardly describes Apple, which continues to
churn out record profits and hot products
like the recent iPhone 6. According to his letter, Icahn’s investment
firm, Icahn Enterprises, owns 53 million shares of the company’s
stock. He opens with words of praise for the company and Cook (“you
are the ideal C.E.O. for Apple”), and then lays out, at great length,
his vision of how Apple will gain market share against its
is just one problem, in Icahn’s view. Unlike Icahn, the market is not
giving Apple its due; its stock, he writes, is massively undervalued.
And how does Icahn propose that Apple solve this problem? By having
the company buy back its own shares. Icahn estimates that Apple’s
price should be at $203, a little more than double its current price
around $100 — and a share repurchase program is the best way to get
there. (When a company buys back its own stock, its earnings per share
go up because fewer shares are in circulation.)
has been down this road before with Apple and Cook; indeed it has been
something of a theme with him in recent years. A year ago, for
instance, Icahn was agitating for a $150 billion buyback (which he
later scaled back to $50 billion). He didn’t get it, but in April of
this year, Cook and the Apple board approved a $30 billion buyback,
which came on top of a $60 billion buyback the year before. Although
Apple had more than $100 billion in cash reserves, most of that money
was locked up overseas because Apple didn’t want to pay the taxes
required to repatriate the money. So instead, it borrowed money to
help finance its buybacks.
what end? Carl Icahn is hardly the sort of long-term investor who has
the best interests of Apple at heart. As William Lazonick, an
economist at the University of Massachusetts, Lowell,
put it in a recent blog post:
Massive buybacks reward those “who have contributed the least to
Apple’s products and profits.”
“Icahn,” he added, “has contributed absolutely nothing to Apple’s
Lazonick is one of the biggest critics of buybacks in academia. Last
month he published an article in Harvard Business Review, titled
“Profits Without Prosperity,” in
which he made the case that buybacks hurt not only the company that is
buying back the stock, but also the country itself. Between 2003 and
2012, he noted, the 449 companies that were publicly listed in the
S.&P. 500 index throughout that time spent 54 percent of their
earnings buying back their own stock. That cost an astounding $2.4
trillion — money that could have been spent hiring workers or making
why have companies been so willing to buy back their own stock?
Companies like to say they are buying their own stock to show faith in
the company’s future. Lazonick shreds such justifications, pointing
out, for instance, that companies tend to buy stock when it is high,
not when it is low.
Rather, he says, the critical incentive for buybacks has been that
chief executives are paid primarily in stock. Share buybacks may
remove capital from the company, but when they raise the stock price,
they enrich the boss.
very people we rely on to make investments in the productive
capabilities that will increase our shared prosperity are instead
devoting most of their companies’ profits to uses that will increase
their own prosperity,” he writes.
Apple, in the late 1980s and early 1990s, when John Sculley was chief
executive, the company spent $1.8 billion buying back its own stock.
That was money it could have really used when the company then
stumbled and needed to issue junk bonds — and issue
$150 million in convertible preferred stock
to Microsoft — just to survive.
are different now, of course. Apple is the king of the hill. Which is
why if any company ought to be able to give Carl Icahn the back of its
hand, it should be Apple. It should be the one making decisions about
how to deploy its capital, rather than bending to the wishes of an
Icahn’s letter to Cook was published, the company pointed out that
between buybacks and dividends, the company was already in the midst
of “the largest capital return program in corporate history.”
already. Let’s hope Tim Cook stops caring what Carl Icahn thinks.
version of this op-ed appears in print on October 25, 2014, on page
A21 of the New York edition with the headline: Carl Icahn’s Bad
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