Everybody Wins When Icahn Gives Up on Apple
I guess the story of Carl Icahn and Apple is that Icahn is withdrawing his proposal to make Apple buy back more stock because he's gotten most of what he wants, but I don't get it? I might tell the story as, Apple was doing a big share buyback, and so Icahn came in and said "hey you should do a big share buyback!," and Apple kept doing what it was doing and ignoring Icahn but he got to claim victory anyway. I'm going to start agitating for Apple to sell phones, I will look like a genius.
If you're keeping score:
- Apple announced in April that it'd be returning $100 billion to shareholders by the end of 2015, $60 billion of it through stock buybacks.
- Carl Icahn tweeted in October that he was pushing for an extra $150 billion buyback over dinner with Tim Cook
- In December, Icahn submitted a nonbinding proposal asking Apple to "commit to completing not less than $50 billion of share repurchases during Apple's fiscal year ending September 27, 2014."
- Last week, Apple sort of casually announced that it had bought $14 billion worth of stock in the previous two weeks, and more than $40 billion over the last year.1
- This week, Icahn dropped his effort to get them to do more, agreeing with Institutional Shareholder Services that Apple was on track to do $32 billion of buybacks this year and that his proposal "effectively only asks the board to spend another $18 billion on repurchases in the current year."2
That is one way to read the facts, I guess. And it does seem reasonable to think that Icahn accelerated Apple's timing a bit -- possibly enough to finish the $60 billion program early and have to increase it, which after all is what Icahn wanted.3
On the other hand Apple hasn't accelerated its buying all that much since Icahn got involved: It bought $21 billion of stock in the six months before Icahn started tweeting, and $19 billion in the four and a half months since.4 Meh! It is hard to see how Icahn deserves much credit for that.
I mean, it's not super hard. While Apple may not have increased its buying much since Icahn launched his Twitter offensive and nonbinding shareholder proposal, it has increased its buying considerably since, you know, 2011. And that is driven in part by a shareholder-value/activism/whatever culture that Icahn has played a part in promoting. Companies can do what Carl Icahn wants even before he wants it, since they more or less know what it will be: More buybacks! And your model of Apple could reasonably run along those lines. After all, Apple is not the first company to make decisions with the goal of anticipating activists, and Icahn was not the first activist to push Apple to return capital to shareholders.5
Obviously there are companies that don't work that way. Amazon is a fascinating example but Google is a simpler one. Here is a Bloomberg News story from this morning about Google's mergers and acquisitions prowess: "Google has executed more deals than any company in the world over the past three years," a total of 127 deals for $17.6 billion. Apple, less so:
Google’s strategy is in contrast to that of Apple Inc., the only Silicon Valley company with more cash on its balance sheet. The iPhone maker has only taken part in 12 deals in the past three years, according to data compiled by Bloomberg, and has been sending cash back to shareholders in the form of dividends and buybacks.
Hmm. What is another difference between Google and Apple?
Google’s shares have climbed 97 percent over the period, while Apple has advanced 48 percent.
No, not that! Come on.
I meant: Google has a notoriously terrible share structure in which the founders have high-vote Class B shares and everyone else has low-vote Class A, which will soon be partially replaced with extra-insulting no-vote Class C shares. In this, Google is like Facebook and lots of other recently public companies that have chosen to avoid good-governance pressure (return capital! listen to shareholders!) by just starting out with terrible governance. If your shareholders can't (effectively) vote, then there's no sense in them submitting nonbinding shareholder proposals demanding that you maximize shareholder value. You're left pretty much in peace, and you can do classically shareholder-unfriendly, empire-building things like being acquisitive rather than classically shareholder-friendly, management-disciplining things like returning cash to shareholders.
When a company such as Facebook goes public with a dual-class share structure, everyone whines about how shareholder-unfriendly it is. But the more its founders can point to the dangers of the big bad public markets, with their activists focused on short-term returns, the easier it is for them to justify governance structures that keep control out of public hands.
One way to think about Icahn is that he's a repeat player trying to maximize his effectiveness in all possible situations, not just whatever he's currently got cooking. Every win makes him more powerful, as companies realize that it's harder to fight him and they should just do what he wants. But every win -- especially every hard-fought win -- endangers his business model, by increasing the incentives of companies to build stronger protections against activism. At the extreme, too much Carl Icahn is enough to drive the next generation of public companies to prefer share structures that make activism impossible. Replace all the Apples of the world with Googles and Icahn will be very bored.
In that model, the Apple situation looks pretty good. Icahn gets to claim a victory, since Apple did what he wants. So whatever he proposes to the next board will look that much more compelling. But on the other hand, Apple doesn't really have a loss, since it was doing what Icahn wanted anyway, and since Icahn ended up blinking first. So the next board, and the next company to go public, might not think Icahn is so scary. And that's good for Icahn too.
1 Things to think about that include:
- That announcement is pretty casual, no? The stock opened up the day after the Wall Street Journal published it, but it was just casually mentioned in an interview with no 8-K. Icahn files his most irrelevant tweets with the SEC, but Apple is more ... restrained, I guess I'll say.
- The $14 billion includes $12 billion of "accelerated share repurchase," which means it wasn't necessarily priced in that two-week period: The ASR involves banks shorting stock to Apple and then buying it in over time, with the final pricing at the end. So Apple probably had some price exposure even after that announcement.
2 Is that ... true? I mean, Apple had bought $5 billion worth of stock by the end of the first quarter of fiscal 2014 (which ended December 2013). Add $14 billion of the accelerated repurchase and I guess you get $19 billion in the first four-and-change months of fiscal 2014, which annualizes to ... I mean, ISS says "it appears to be on track to repurchase at least $32 billion in shares" and, sure, that is a number. Best not to worry too much about this. Better to worry about the fact that everyone sort of thought Icahn was arguing for buybacks on top of Apple's existing program, though Icahn was actually pretty cagey about that and his proposal just said "not less than $50 billion."
3 So Apple bought back $23 billion of stock in fiscal 2013, of which $21 billion came in the second half: $16 billion in the third quarter (April through June, see page 15 of this 10Q: $12 billion of ASR and $4 billion of open market in the third quarter) and $5 billion in the fourth quarter (see page 68 of this 10K, and subtract the $4bn previously used from the $9bn full-year open market repurchase). It bought $5 billion in the first quarter of 2014 (ended December 2013), and (at least) $14 billion since then, for $40 billion of its total $60 billion authorization in the first, call it, 10 months of the program. At that rate it would run out of authorization by the summer.
4 See above -- that's $21 billion in the second half of fiscal 2013 (April through September 2013), and $19 billion from October 2013 through last week.