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Source: The New York Times, October 24, 2014 editorial

The Opinion Pages | OP-ED COLUMNIST


Carl Icahn’s Bad Advice

OCT. 24, 2014

Why 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.

But 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 competitors.

There 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.)

Icahn 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.

But to 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 success.”

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 capital investments.

And 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.

“The 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.

As for 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.

Things 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 activist shareholder.

After 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.”

Enough already. Let’s hope Tim Cook stops caring what Carl Icahn thinks.

A 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 Advice.

© 2014 The New York Times Company



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