Greenlight Capital Files Lawsuit Against Apple To Get Rid Of Preferred Stock

Posted Feb 7, 2013

Hedge fund manager David Einhorn has filed a lawsuit against Apple.  Einhorn is asking shareholders to vote against a proposal from Apple.  Apple’s proposal is to eliminate the company’s ability to issue preferred stock that has paid a dividend.  Einhorn has been talking to Apple about finding ways to unlock the $137 billion pile of cash that they are sitting on.

Einhorn believes that Apple is violating securities rules by bundling several shareholders into one proposal according to The New York Times.  Greenlight holds 1.3 million shares in the company valued at over $590 million.  Einhorn believes that by using preferred stock, Apple could get a lot more credit for the cash that they are holding on to.

Below is an excerpt from Einhorn’s press release about the deal as highlighted by BusinessInsider:

For example, Apple could initially distribute to existing shareholders $50 billion of perpetual preferred stock, with a 4% annual cash dividend paid quarterly at preferential tax rates. Once a trading market is established and the market recognizes the attractiveness of a highly liquid, steady yielding instrument from an issuer backed by Apple?s unmatched balance sheet and valuable franchise, the Board could evaluate unlocking additional value by distributing additional perpetual preferred stock to existing shareholders.  With this conservative action, Greenlight believes the Board could unlock hundreds of billions of dollars of latent shareholder value.

Assuming Apple retains its price to earnings multiple of 10x and the preferred stock yields 4%, our calculations show that every $50 billion of perpetual preferred stock that Apple distributes would unlock about $30 billion, or $32 per share in value.  Greenlight believes that Apple has the capacity to ultimately distribute several hundred billion dollars of preferred, which would unlock hundreds of dollars of value per share.  Further, Greenlight believes additional value may be realized when Apple?s price to earnings multiple expands, as the market appreciates a more shareholder friendly capital allocation policy.

Einhorn praised Apple as a company with talented people creating iconic products, but he expressed disapproval of how the company is managing their finances.  He believes that the $137 billion that the company is holding on to is shortchanging shareholders.  Einhorn presented suggestions to Apple’s board, but was rejected several times.

Apple’s share price has fallen down over 26% over the last 6 months.  Einhorn believes that the company’s near collapse in 1997 scarred the company.  He compared the company’s actions now to his grandmother, who survived the Great Depression.  Both have tendencies to hold on to as much cash as possible instead of putting it into more productive investments.

[Image credit of David Einhorn from the homepage:]