Carl Icahn is agitating again. Below is a suggested response from Apple CEO Tim Cook.
Dear Carl,
Thank you for your 4,000-word vote of confidence in my leadership and for making the case so strongly that Apple Inc. shares are a half-price bargain.
While we may disagree about the math, it is certainly gratifying to hear that you are happy with our newest products, platforms and services, that you have faith in our ability to capture greater market share with the iPhone 6 and that you are committed to retaining your important investment of just under 1 per cent of Apple stock – regardless of whether we heed your renewed call to launch a more aggressive stock buyback program.
I must say that this has not always been your style. Your many successes as a corporate raider-turned-activist investor have shaken up boards, driven out chief executives, driven up stock prices in the short term and done wonders for your net worth. But they have not typically resulted in huge long-term rewards for other investors or prompted you to start playing the long game, a la Warren Buffett.
Now you argue in your open letter that Apple is badly undervalued, given its prospects. You won't get any argument from this office. After all, we have a vested interest in getting the stock price higher, so thank you for making your case in public.
Your confidence shows in your bullish forecasts for fiscal 2015 of 25 per cent higher revenue and a 44-per-cent increase in earnings per share. That's well above the street's consensus of 12 per cent more revenue and 15-per-cent EPS growth. I must say that although the terrific critical and market response to the iPhone 6 and the new Apple Watch and the continuing demand for our iPads and Macs bodes well for the fiscal year, we have always been conservative about such estimates and will remain so.
Of course, we would love it if other investors bought your questionable math showing Apple's true level should be $203 (U.S.) a share, double the current level and far beyond what the most bullish analysts predict for us in the year ahead. That would put our total market value at $1.2-trillion, which would amount to more than 1.5 per cent of global GDP. No other company has ever scaled such heights.
But we do take issue with your preferred method of driving up the stock price, namely by "meaningfully" accelerating and boosting the magnitude of share buybacks.
Need I remind you that with a more than doubling of share repurchases and dividends starting in 2013, when you first agitated for change, we embarked on the biggest return of capital to shareholders in history. By the end of next year, we will have spent $100-billion on dividends and buybacks.
I know you are drawn like a greedy moth to a flame when you eye our growing amount of cash and short-term securities – $164.5-billion at the end of June. But your argument that we must get more of this money into the hands of shareholders shows a lack of understanding of Apple's needs, its tax structure and the tech sector in general.
Simply put, we are not as strong as we look and we need a far bigger cash cushion than you realize. To drive innovation and maintain our leading edge in the marketplace, we must continue to take big risks, which can also mean costly missteps until we get things right. Bill Gates famously warned investors that technology companies need huge amounts of cash because research and development costs for new products and services, some of which won't ever see the light of day, can burn through reserves in a hurry.
Another thing you deliberately ignore. Most of our cash, $137.7-billion worth, sits in our foreign subsidiaries and cannot be repatriated to cover dividends or buybacks without incurring a hefty tax penalty. That's why we issued debt to finance the current program. Although you may have no qualms about Apple borrowing more at current low rates, we do.
Your letter arrived just a few days after we commemorated the third anniversary of Steve Jobs' passing, which always serves as a reminder of the values on which he built Apple and which continue to guide us today. His focus was always on producing cutting-edge, elegant, people-friendly products that would thrill customers, drive sales, build long-term value and benefit patient investors. Short-term measures such as stock buybacks and dividend payments to boost "shareholder value" were not part of his vocabulary.
In arguing for us to hand over a great deal more cash to investors, you have said that Apple is not a bank. I would add that Steve did not want us to be borrowing much from banks either.
I hope that clarifies our position, and that you stay on our bandwagon and keep plugging the stock.
Sincerely,
Tim Cook