Carl Icahn Would Like to Ask a Favor of Apple

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Carl Icahn is an "activist shareholder." What that means is that he buys big chunks of a handful of carefully selected companies and pushes them to make big strategic or financial changes so that his shares will go up, launching proxy fights or takeover bids if necessary to get what he wants. Carl Icahn is a billionaire and The Most Important Investor In America apparently.

John Chevedden is an "activist shareholder." What that means is that he buys a few shares of a bunch of companies and submits nonbinding shareholder proposals to those companies to call attention to corporate governance issues like executive pay and director election procedures. John Chevedden rides the subway to shareholder meetings apparently.

Those are different things! "Activist shareholder" is a squishy term, but it seems to describe two pretty distinct groups. One is a small group of people who manage large investment firms and who are the business of doing things to public companies. The other is a group of people -- some of whom manage their own small retirement accounts, others of whom manage massive pension systems that dwarf Carl Icahn's company -- who are in the business of asking companies to do things.

The activists who do things have a limited but effective category of things they can do. They can mount a hostile takeover bid. They can wage a proxy fight to replace one or two or three or all of a company's directors. They can sue to force companies to do things. That's about it really.

But that's immensely effective. Directors and executives don't want to be fired after a proxy fight or hostile takeover, and the risk of that happening focuses their minds on avoiding escalation. When Icahn buys 9.9 percent of a company he can usually get his calls to the chief executive officer returned, and he can often get his way without actually doing the proxy fight or the takeover.

The activists who do things act like owners: Their capital is at risk in the company, but for some reason the agents that that capital has hired to manage the company are temporarily out of line with the owners' wishes. The activists correct that, in the ways that you'd expect owners to: They fire management, or they convince management to change its ways on pain of being fired.

The activists who ask companies to do things act like, um, activists. They complain and protest and draw attention to the issue and try to get other people to agree with them, and to shame and guilt and cajole and embarrass and persuade companies into doing what the activists think is the right thing. They have no binding tools, though: Even if shareholders vote in favor of a Chevedden proposal to declassify a board or do a study on executive pay, the board can just ignore them. Those proposals are normally nonbinding. The penalty for saying no is further annoyance. It is unlikely to be a hostile takeover.

They tend to act less like owners, too. Their focus is often on making the world better, not making money. Many of these precatory shareholder proposals are about environmental impact or political giving or labor rights. Some are about toilets.

Yesterday, Icahn tweeted: "Gave $AAPL notice we'll be making a precatory proposal to call for vote to increase buyback program, although not at $150 billion level." If you haven't been following this, Icahn occasionally has dinner with Apple CEO Tim Cook and tries to convince Cook to increase Apple's share buyback program; then he tweets about it. He's been pushing for a $150 billion buyback (not counting Apple's current $100 billion capital return program), but he's now planning to submit a nonbinding proposal asking the board to at least add $50 billion to the buyback.

What's weird about this -- besides the one-sided tweeting of the dinner conversations, which I at least would find awkward -- is that precatory proposals are not really a big part of the activist-investor (in the Icahn sense) playbook. They are a little too ... precatory? Like the plan of action here is that Icahn wages a proxy fight with Apple -- sending out proxies and soliciting votes and incurring all the expense and complication and ill-will and, let's face it, fun of a real proxy fight -- but at the end of the day, if he wins, nothing happens. Apple's management is apprised of the fact that a majority of its shareholders want more money, and then it goes and does what it wants with that fact. This has some of the form of Icahn-style activism -- the publicity, the proxy fight -- but doesn't promise much of the results.

Also Icahn owns just over 0.5 percent of Apple. Normally the idea of Icahn-style activism is to take big concentrated positions, both so that you can have a big influence on the vote and so that you can capture a significant portion of the benefits of your activism. Here, though, if Icahn can improve Apple's stock price by spending money and time on a proxy fight, 99.5 percent of the benefit will go to free riders.

Hard to get around that: Apple is really big, and Icahn's 0.5 percent stake is worth about $2.7 billion at today's prices, so getting an order of magnitude bigger isn't really in the cards for him. It still makes Apple a strange target. Icahn is The Most Important Investor In America! He's used to throwing his weight around. Apple is very, very heavy.

So why target Apple, where Icahn can't or won't do the things that make him successful in his other activist situations? My theory of late-period Carl Icahn has long been that his main goals are entertaining himself and getting lots of attention, with making money a far less important motivator. Certainly targeting Apple, and tweeting about it, is a good way to get attention.

But there's another possibility, which is that Apple, under Tim Cook, has shown itself to be unusually open to pestering. Most companies are open to persuasion from shareholders as long as it's polite: private meetings urging financial or strategic changes, not public sniping. And most companies are open to impolite persuasion from shareholders, too, when that persuasion is backed by threats: If you can vote out the CEO, the CEO will listen to you.

But early this year, David Einhorn tried to get Apple to return more capital to shareholders. He did this through a combination of fairly hedge-fund-activist, not do-gooder-activist, methods, but without owning all that much stock. (His hedge fund, Greenlight Capital, owned about 1.3 million shares at the time, or about 0.14 percent of the company.) He offered financial-engineering advice. He gave public presentations with financial analyses to other shareholders. He geared up for a proxy fight -- not to throw out directors or take over the company, but to block Apple from doing a boring and ministerial thing that it wanted to do. He also sued, to accomplish the same end, and won.

And two months later Apple announced a $100 billion capital return program. Is that because Einhorn asserted the power of ownership over Apple by preventing the board from doing what it wanted? Mehhh that seems unlikely: Apple did a different thing from the thing he wanted, two months after he won a fairly small victory. Is it because of polite private conversations with shareholders who thought it would be a good idea? Sure, probably, I'd guess that was a big part of the likely explanation. Is it also in part because Einhorn noisily and impolitely called attention to the issue? Maybe? I don't know that that would be your leading candidate for what persuaded Apple, but there's at least a possibility that noisy public pestering worked. And surely if, like Icahn, you were naturally inclined to noisy public pestering, that would be enough for you.

  1. Or "activist investor," or "shareholder activist." There is probably a usage distinction in that "activist investor" is more often used for the Icahn type, "shareholder activist" is more often used for the Chevedden type, and the CalPERS type -- which I mostly lump with Chevedden in their unconcentrated stakes and fondness for governance technicalities -- is more mixed. But this distinction is not all that strict; you wouldn't be surprised to hear someone call Icahn a "shareholder activist" or Chevedden an "activist investor." "Activist shareholder" seems like a sort of neutral in-between to me but your idiolect may vary.

  2. There are probably some other odds and ends. You can buy debt of a company that's heading to bankruptcy and hope to control it in bankruptcy. You can offer various bits of financing to the company -- a loan, or a PIPE, or a white-knight takeover offer -- in exchange for concessions. You can seek appraisal in a merger.

  3. Oh I mean you can get a bad governance score from ISS and your stock goes down and then eventually Icahn comes in and takes you over, but that causal chain is pretty weak. And he's not taking you over because of your majority-voting bylaws or whatever.

  4. Specifically, amend Apple's charter to change the par value of its common stock and remove the board's ability to issue "blank check" preferred stock. Apple's board probably didn't care too much about this: It was nice-to-have governance cleanup stuff, not important. It was important to Einhorn, though, as his capital return plan involved issuing a big slug of preferred stock and that would have been made more difficult by those amendments.

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