Apple CEO Cook Weighs Greenlight Push for Preferred Stock

Apple Inc. Chief Executive Officer Tim Cook said the iPhone maker will “thoroughly consider” a push by Greenlight Capital Inc.’s David Einhorn to use some of its $137.1 billion in cash and securities for preferred stock.

Eighteen months after succeeding Steve Jobs as CEO, Cook is facing pressure from shareholders, who have seen the stock slump more than 30 percent since September amid slowing sales growth and tighter competition from rivals such as Samsung Electronics Co. Greenlight is suing Apple to block a proposal to eliminate the board’s ability to issue preferred stock without shareholder approval, a legal effort Cook called a “silly sideshow.”

“We welcome all ideas from all of our shareholders, including Greenlight, and we’re going to seriously consider it,” Cook said today at an investor conference in San Francisco hosted by Goldman Sachs Group Inc. “The management team and the board are in very active discussions.”

Einhorn is recommending that Apple issue $50 billion of preferred stock, to be traded alongside common shares and funded by operating cash flow. It would have a 4 percent annual cash dividend, paid quarterly, he said in a letter to shareholders. Preferred stock can have a higher yield and be issued without diluting the value of common shares.

Greenlight’s Suit

Following Cook’s comments, Greenlight defended its lawsuit and urged Apple to adjust its proxy plan that will go to a vote at its annual shareholder meeting on Feb. 27.

“If Apple thinks the lawsuit is a waste of resources, it could simply end the matter by complying with existing law and filing a new proxy that unbundles the proposed changes to the charter so that shareholders can express their views on each matter separately,” Greenlight said in a statement.

Separately, Apple won the backing of shareholder advisory firm Glass Lewis & Co. for its proposal that would bar the company from issuing preferred shares without the consent of investors.

Whatever the outcome, Apple won’t issue preferred stock without shareholder approval, Cook said.

“We would clearly go for a vote, whether our charter requires it or not,” Cook said.

Apple, based in Cupertino, California, fell 2.5 percent to $467.90 at the close in New York.

Slower Growth

The back-and-forth highlights investor concern as growth slows for the iPhone, Apple’s biggest source of revenue and profit, in a smartphone market that is becoming increasingly saturated. At the same time, new products such as the iPad mini -- priced to challenge tablets from Google Inc. and Amazon.com Inc. -- are eroding profit margins.

“I was encouraged to hear that Cook thought the Einhorn proposal was creative, even if that’s not what they ultimately do,” said Josh Spencer, a fund manager at T. Rowe Price Group Inc., which held 2.5 percent of Apple shares as of Sept. 30. “I think they’re going to return a large amount of cash to shareholders.”

Cook also discussed Apple’s acquisition strategy. Apple will continue to buy about one company every two months, he said. While Cook has looked at some companies for large deals, none have passed muster, he said.

“Cash isn’t burning a hole in our pocket,” Cook said. “We’re disciplined and thoughtful and we don’t feel a pressure to go out and acquire revenue. We want to make great products. If a large company could help us do that even better, we’d consider it.”

IPhone Demand

Asked whether Apple might make a less-expensive iPhone to appeal to budget-conscious customers and users in developing countries, Cook pointed to price cuts for older models of the iPhone and iPod. The iPhone 4 is available for free with a wireless contract in the U.S., compared with a $199 starting price for the iPhone 5.

The popularity of the iPhone 4 following a price reduction last year caught Apple off guard, Cook said.

“We didn’t have enough supply of the iPhone 4,” he said. “So it surprised us, as to the level of demand we had for it.”

Apple will enlarge 20 of its stores this year, and add 30 more retail outlets, including its first in Turkey, Cook said. On average, each store is generating about $50 million in annual sales.

Rewarding Shareholders

To bolster gross margins, the company could sell more software and services, Cook said.

“We’re not a hardware company,” Cook said. “We have other ways to make money and reward shareholders.”

One option could be a payments service linked to the more than 500 million credit cards associated with users’ iTunes accounts, Katy Huberty, an analyst at Morgan Stanley, wrote in a research report.

Cook said he’s “never been more bullish” on the innovative products in Apple’s pipeline.

“We are managing Apple for the long term,” Cook said. “I know people worry about quarters. We care, but the product decisions we make are for Apple’s long-term health, not for the short 90-day clock.”

To contact the reporters on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net; Peter Burrows in San Francisco at pburrows@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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