Hedge fund star manager David Einhorn was arguably Apple Inc's biggest
cheerleader on Wall Street with a stake worth about $600 million and an
oft-cited prediction that the company's market value would hit $1
trillion some day.
So it was a shock on Thursday when Einhorn
announced that he was suing Apple to get it to deploy its $137.1 billion
cash pile more effectively and arrest a 35 percent drop in its share
price from a record high logged last September.
Unknown to Wall
Street, Einhorn had for months been imploring Apple's chief financial
officer, Peter Oppenheimer, to have the company issue dividend-paying
preferred shares to reward investors and juice the stock price.
Einhorn
told Reuters he felt blindsided when he received Apple's January 7
annual proxy statement and saw that it contained a proposal that would
make it more difficult for the company to issue preferred stock.
"We
saw that the proxy came out and we saw they were planning to get rid of
preferred and then we said, 'Wait a minute, we are not going to be able
to bring this up again in a good way if we allow them to do this. So we
should contest it now,'" Einhorn said in a phone interview.
Einhorn's
$8 billion Greenlight Capital Inc on Thursday sued Apple in U.S.
District Court in New York, asserting that its Proxy Proposal 2 would
"restrict the board's ability to unlock the value on Apple's balance
sheet.
The 44-year-old hedge fund manager, who made his name and
fortune by predicting the collapse of Lehman Brothers, is also urging
Apple shareholders to vote against the proxy proposal at the company's
annual meeting on February 27.
Apple said in a statement that it
will evaluate Greenlight's recommendation and denied that its proxy
proposal was aimed at preventing the issuance of preferred stock. If
Proxy Proposal 2 is adopted, Apple said it could still issue preferred
stock as long as it obtained approval from shareholders.
But the extra hurdle, from Einhorn's point of view, was unacceptable and so he took the matter to Apple CEO Tim Cook.
The
way Einhorn tells it, Cook was more receptive than his CFO and the two
sides are still talking. But Einhorn decided to file suit anyway because
of the approaching annual meeting.
"The lawsuit is just to get the proxy sorted out," he said.
Long on Apple
Einhorn began investing in Apple in 2010 and holds 1.3 million shares worth about $600 million at current values.
He
emerged as a prominent advocate for the stock after it began to fall
last year following some disappointing quarterly results, stiffer
competition in the smartphone market, and product snafus that fueled
fears Apple had lost its innovative edge following the death of
co-founder Steve Jobs.
Einhorn said in a letter to investors last
month that Greenlight had taken advantage of the drop in Apple's shares
to buy more stock in the fourth quarter. That was one reason the fund
posted a negative return of 4.9 percent in the quarter.
Since May
last year, Einhorn has been urging the company to unlock several hundred
billion dollars of shareholder value by distributing preferred stock,
which he favored over a share buyback because it did not deplete cash
immediately.
In private conversations with Oppenheimer, Einhorn
said Apple could initially distribute $50 billion of perpetual preferred
stock with a 4 percent annual cash dividend paid quarterly at
preferential tax rates.
But, according to Einhorn, Oppenheimer and his advisers calculated the dividend to be 8 percent, which they deemed too high.
"We
said, that's crazy. That's crazy. We think 4 percent. If we're wrong,
maybe it's 4.5 percent or 4-1/4 percent - it is not 8 percent. So, we
kind of agreed to disagree. We kind of sat on it for a few months,"
Einhorn said.
When he eventually took the matter to Cook, Einhorn
said he felt that the CEO did not know all the details of Einhorn's
discussions with Oppenheimer.
"When I discussed this with Tim
Cook, and actually, the conversation has been going on for the last
couple of weeks, he said that he wasn't familiar with my previous
conversations with Peter Oppenheimer and whoever Peter Oppenheimer's
advisers were. I was surprised by that.
"I think we got the
brush-off the first time," Einhorn said about Oppenheimer and his
advisers. "I don't know what the communication was" between Oppenheimer
and Cook.
Apple declined to comment on the specifics of the discussions with Einhorn.
A
source familiar with the matter characterized the interaction with the
hedge fund manager as "cordial," saying that there had been "friendly
disagreement" only on whether common shareholders should be allowed to
vote on something as significant as an issuance of preferred stock.
Near death experience
Einhorn
said in a television interview that despite their differences, he felt
Cook was doing an excellent job as CEO, but he described Apple's
management as having a "Depression-era" mentality that led it to hoard
cash and invest only in the safest, lowest-yielding securities.
"In
other words, people who have gone through traumas...and Apple has gone
through a couple of traumas in its history, they sometimes feel like
they can never have enough cash," Einhorn said on CNBC.
Cook and
Oppenheimer both joined Apple during the turbulent late 1990s when the
tech company was struggling to stay afloat and before Steve Jobs
engineered a sensational turnaround with products like the iPhone and
iPad that became must-haves for consumers around the world.
Oppenheimer
later earned a reputation on Wall Street for extreme conservatism in
cash management. The company likes to remain liquid by investing in safe
but low-yielding U.S. Treasury and agency debt, shies away from big
acquisitions, and repeatedly preaches a "capital preservation" mantra to
investors.
Under Cook in 2011, Apple gradually loosened the reins, announcing its first multi-year dividend and share repurchase programs.
Einhorn
and Apple will have another bout when they air their arguments on
February 22 in court. Before then, the outspoken fund manager will be
lobbying other shareholders.
Analysts say one benefit of preferred
stock is that up to 80 percent of the dividends can be tax-free for
corporate investors, although preferred shares tend to be less liquid
than ordinary shares or bonds.
"The idea is powerful and when I
have a chance to explain it to the shareholders, most will see it as an
enormous win-win," Einhorn said.
© Thomson Reuters 2013