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Source: San Jose Mercury News, October 24, 2013 article


Carl Icahn wants 'unprecedented' $150 billion stock buyback for Apple

Posted:   10/24/2013 03:21:26 PM PDT

Updated: 10/24/2013 04:01:46 PM PDT


FILE - Financier Carl Icahn, seen in this March 16, 2010 file photo, has told Apple CEO Tim Cook that the iPhone and iPad maker should launch a $150 billion stock buyback immediately and disclosed that he now owns 4.7 million shares in the company. (Henny Ray Abrams/AP Photo)


On the eve of Apple's (AAPL) earnings call Monday, activist investor Carl Icahn is pressuring CEO Tim Cook for an "unprecedented" $150 billion stock buyback that Icahn says would nearly double the value of Apple shares.

Icahn recently increased his stake in Apple by 22 percent -- from 3.87 million shares to 4.73 million shares -- and on Thursday unveiled a letter he wrote to Cook calling for the stock buyback.

Icahn's proposal would come on top of Apple's current plans to repurchase $60 billion worth of shares over three years.

In the letter that he posted on his new website,, Icahn called Apple's $60 billion buyback "simply not large enough."

Shares of Apple closed at $531.91 Thursday, but Icahn wrote to Cook that a $150 billion stock buyback would drive Apple shares up to $1,250.

With $147 billion in cash on Apple's books, Icahn wrote, "we find it difficult to imagine why the (Apple) board would not move more aggressively to buy back stock by immediately announcing a $150 billion tender offer (financed with debt or a mix of debt and cash on the balance sheet).

"While this would certainly be unprecedented because of its size, it is actually appropriate and manageable relative to the size and financial strength of your company," he continued.

Apple did not respond to a request for comment.

Icahn's letter followed a dinner meeting he had in September with Cook.

Icahn, who owns an estimated 9 percent of Dell, had been fighting to keep Dell public. But around the same time as his dinner meeting with Cook, Icahn wrote an open letter to Dell shareholders saying he no longer would challenge a buyout proposal from company founder Michael Dell and Silver Lake Partners.

Scott Rothbort, president of LakeView Asset Management, said Icahn's strategy with Apple is different from his intentions with Dell.

With Dell, Icahn "wanted to take over a company and install new management and re-engineer the company from top to bottom," Rothbort said. "With Apple, all he's saying is he wants to re-engineer the bottom line."

"If Tim Cook looks at him in a mentor role, as an elder statesman, it will be beneficial," Rothbort said.

But Gary Lutin, chairman of The Shareholder Forum, was involved with Icahn's efforts in the Dell takeover and warned Apple and its shareholders to regard Icahn with caution.

With Dell, Lutin said, "he got a lot of people to follow him, then he negotiated a settlement and didn't share whatever he got with them."

"He's making proposals the way he did with Dell," Lutin said. "He makes a proposal that appears to appeal to a large number of active traders as something that represents a potential value increase. And he knows that when he gets on TV, the stock price continues to fluctuate in a predictable manner and he's going to make a profit on that."

Contact Dan Nakaso at 408-271-3648. Follow him at

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Activist investor Carl Icahn posted a letter to Apple (AAPL) CEO Tim Cook on his new Shareholders Square Table website on Thursday, urging a $150 billion stock buyback to boost the price of Apple shares. Here is the text of the letter:

"Dear Tim:

It was a pleasure meeting you for dinner at the end of September. When we met, my affiliates and I owned 3,875,063 shares of Apple. As of this morning, we owned 4,730,739 shares of Apple, an increase of 22% in position size, reflecting our belief the market continues to dramatically undervalue the company, even when taking into account the recent market appreciation, which in turn makes our proposal unchanged with respect to a $150 Billion buyback. We were pleased to hear at our dinner that you appreciated our input and that you would speak to us again in three weeks to continue the dialogue. In anticipation of doing so soon, we aim to reiterate in this letter the point of view already expressed to you directly with the hope of effectively summarizing it for the company's board of directors and our fellow shareholders.

From our perspective, Apple is the world's greatest consumer product innovator and has one of the strongest and most respected brand names in history. We consider Apple to be our most compelling investment. I first informed my followers on Twitter on August 13, 2013 of my "large position." I also expressed to you my opinion that "a larger buyback should be done now." At that time, we owned 3,448,663 shares and the stock price was $467. Since then we have purchased an incremental 1,282,076 shares (bringing the total value of my position to $2.5 Billion) and we currently intend to buy more.

We want to be very clear that we could not be more supportive of you, the existing management team, the culture at Apple and the innovative spirit it engenders. The criticism we have as shareholders has nothing to do with your management leadership or operational strategy. Our criticism relates to one thing only: the size and timeframe of Apple's buyback program. It is obvious to us that it should be much bigger and immediate.

When we met, you agreed with us that the shares are undervalued. In our view, irrational undervaluation as dramatic as this is often a short term anomaly. The timing for a larger buyback is still ripe, but the opportunity will not last forever. While the board's actions to date ($60 billion share repurchase over three years) may seem like a large buyback, it is simply not large enough given that Apple currently holds $147 billion of cash on its balance sheet, and that it will generate $51 billion of EBIT next year (Wall Street consensus forecast).

The S&P 500 trades at roughly 14x forward earnings. After backing off net cash, Apple trades at just 9x (not factoring into account that the company has a significantly lower cash tax rate than the rate Wall Street analysts use). This discount (cash adjusted) becomes even more compelling given our confidence that Apple will grow earnings per share at a rate well in excess of the S&P 500 for the foreseeable future. With such an enormous valuation gap and such a massive amount of cash on the balance sheet, we find it difficult to imagine why the board would not move more aggressively to buy back stock by immediately announcing a $150 Billion tender offer (financed with debt or a mix of debt and cash on the balance sheet).

While this would certainly be unprecedented because of its size, it is actually appropriate and manageable relative to the size and financial strength of your company. Apple generates more than enough cash flow to service this amount of debt and has $147 billion of cash in the bank. As we proposed at our dinner, if the company decided to borrow the full $150 billion at a 3% interest rate to commence a tender at $525 per share, the result would be an immediate 33% boost to earnings per share, translating into a 33% increase in the value of the shares, which significantly assumes no multiple expansion. Longer term (in three years) if you execute this buyback as proposed, we expect the share price to appreciate to $1,250, assuming the market rewards EBIT growth of 7.5% per year with a more normal market multiple of 11x EBIT.

It is our belief that a company's board has a responsibility to recognize opportunities to increase shareholder value, which includes allocating capital to execute large and well-timed buybacks. Apple's Board of Directors does not currently include an individual with a track record as an investment professional. In my opinion, any further delay in executing the buyback we hereby propose will reflect this lack of expertise on the board. My firm's success and my expertise as an investor would be difficult for anyone to argue. Per my investment thesis, commencing this buyback immediately would ultimately result in further stock appreciation of 140% for the shareholders who choose not to sell into the proposed tender offer. Furthermore, to invalidate any possible criticism that I would not stand by this thesis in terms of its long term benefit to shareholders, I hereby agree to withhold my shares from the proposed $150 Billion tender offer. There is nothing short term about my intentions here.


Carl Icahn

Chairman, Icahn Enterprises (IEP)"


Copyright © 2013 San Jose Mercury News


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