Apple Inc. (AAPL): Is Carl Icahn Right?

Carl Ichan1Carl Icahn, the activist investor best known for bending various companies to adopt more shareholder friendly practices, now has a new target for his shareholder activism; Apple Inc. (NASDAQ:AAPL). In a letter to Tim Cook, Icahn implored Apple to engage in an incredible buyback of Apple shares, $150 billion worth in fact. [Related: Apple Inc. (AAPL): Carl Icahn’s Letter Says Shares Could Hit $1,250]

In the letter, Icahn discussed how he has increased his position in Apple to just over 4.7 million shares, representing a total market value of around $2.5 billion, and how a massive stock buyback would be beneficial to the company. He also reiterated that he loved how Cook and company were operating the business, and that his only disagreement with management came with respect to the distribution of the cash.

Icahn also said that the current buyback program– $60 billion over three years—isn’t enough given the size of Apple. His proposal probably also edges out Apple’s current cash stockpile, which has steadily grown and is now probably sitting just under $150 billion as well. However, much of this cash is in foreign locales, so there would a repatriation tax that could take a sizable chunk of Apple’s buyback.

For this reason, Icahn appears to favor taking out debt in order to do the buyback, and using operational cash flows in order to service the debt. And with interest rates near record lows and the strength of Apple’s brand and the size of their cash war-chest, you have to believe that the company could certainly afford such a plan, and that it would help shareholders in the short run. [Related: Apple Inc. (AAPL) Target Levels Identified]

“As we proposed at our dinner, if the company decided to borrow the full $150 billion at a 3% interest rate to commence a tender at $525 per share, the result would be an immediate 33% boost to earnings per share, translating into a 33% increase in the value of the shares, which significantly assumes no multiple expansion,” Icahn continued in the letter.


Still, the size and scope of such a buyback is truly enormous, and is roughly equal to 30% of the total market capitalization of Apple. And at $150 billion, it would be unprecedented. And considering how quickly things can change in technology, a big cash cushion could be very welcomed if an Apple product flops.

Personally, I think the massive level is a little absurd. To push back everything to shareholders via a buyback—at the behest of a notoriously short-term focused investor like Icahn—is a little unsettling.

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