* Activist shareholder demands more cash for investors
* Einhorn targets move to cut preferred stock from charter
* Apple says its proposal would not prevent preferred shares
* Source says talks between Apple, Einhorn cordial
By Jennifer Ablan and Poornima Gupta
NEW YORK/SAN FRANCISCO, Feb 7 Apple Inc
on Thursday confronted its first major challenge from an
activist shareholder in years as hedge fund manager David
Einhorn's Greenlight Capital filed suit against the company and
demanded it dole out a bigger piece of its $137 billion cash
pile to investors.
The unusual move comes as the world's largest technology
company grapples with a tumbling share price, mounting
competition in the smartphone and tablet markets and concerns
about its ability to produce new breakthrough products.
Einhorn, a well-known short-seller and Apple gadget fan,
said in an interview with CNBC that the company harbored a
"Depression-era" mentality that led it to hoard cash and invest
only in the safest, lowest-yielding securities.
Apple nearly went broke in the 1990s before Steve Jobs
returned and engineered a sensational turnaround, with products
such as the iPhone and iPad that became must-haves for consumers
around the world. The company's near-death experience has led
Apple to be exceptionally conservative with its cash.
Last March, just months after Jobs' death, Apple responded
to a barrage of investor criticism over its large cash hoard by
initiating a quarterly cash dividend and a share buyback that
would pay out $45 billion over three years. At the time, Apple
was sitting on $98 billion in cash.
Einhorn's lawsuit filed in U.S. District Court in Manhattan
targets a proposal by Apple to eliminate from its charter "blank
check" preferred stock. The board now has discretion to issue
preferred stock but is asking shareholders at its annual meeting
on Feb. 27 to vote on a proposal that would first require
Einhorn urged Apple shareholders to vote against the plan,
and put forward his own proposal for an issuance of preferred
stock - which he deems superior to dividends or share buybacks -
with a perpetual 4 percent dividend.
Analysts have expected stockholder pressure to increase as
Apple's share price declines and its outlook grows murkier.
Stock in the company that once seemingly could do no wrong has
fallen 35 percent since its September record high through
Wednesday. It ended Thursday 3 percent higher at $468.22.
Einhorn, often cited as one of the most committed Apple
bulls, remains long on its shares. But the fund manager, whose
Greenlight had a sub-par year in large part because of Apple's
late-2012 stock swoon, said the company needs to fix its "cash
"It has sort of a mentality of a depression. 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.
Some investors, who have long railed against what they saw
as Apple's ultra-conservative attitude toward its cash, rallied
around the principle of returning cash to shareholders.
In an interview with Reuters, Einhorn said he had gone to
Apple CEO Tim Cook in recent weeks after the company's chief
financial officer, Peter Oppenheimer, brushed off his entreaties
in September. Cook, who is rarely known to engage investors in
exclusive conversations, was unaware of the earlier
conversations with Oppenheimer, according to Einhorn.
"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," Einhorn told Reuters.
But Apple fired back on Thursday afternoon, saying Einhorn's
lawsuit over the shareholder proposal was misguided and that
striking the "blank check" provision from its charter would not
preclude preferred share issuances in future.
"Contrary to Greenlight's statements, adoption of Proposal
#2 would not prevent the issuance of preferred stock," it said
in a statement. "Currently, Apple's articles of incorporation
provide for the issuance of 'blank check' preferred stock by the
Board of Directors without shareholder approval. If Proposal #2
is adopted, our shareholders would have the right to approve the
issuance of preferred stock."
A source familiar with the discussions Apple was having with
Einhorn said that talks with Einhorn as recently as this week
had been cordial, 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.
But the source added that Apple, while willing to consider
investors' point of view, will eventually decide in the best
interest of all shareholders.
Oral arguments between Apple and Einhorn have been set for
Feb. 22 in U.S. District Court for the Southern District of New
York. Apple has until Feb. 15 to respond to Greenlight's suit,
after which Einhorn has until Feb. 18 to reply.
"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 the interview.
SHARES "UTTERLY MISVALUED"
Einhorn's actions go well beyond increasingly common
shareholder calls for Apple to increase its dividend or buy back
shares. Einhorn argues preferred stock - which functions like a
bond in that it pays a fixed dividend over time - is a better
route because the company won't have to use cash right away.
Analysts say another benefit is up to 80 percent of the
dividends from preferred stock can be tax-free for corporate
investors and it is not logged as debt on the balance sheet. But
the tactic is generally pursued by low-growth companies, where
capital gains are less assured.
"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 told Reuters.
Calling Apple shares "utterly misvalued" at current levels
in the CNBC interview, Einhorn said the company no longer needs
to grow at the near triple-digit rates of the past.
For every $50 billion in preferred stock that Apple gives
away to shareholders, it could unlock $32 a share in value for
investors, Einhorn said, without explaining his rationale.
"We understand that many of our fellow shareholders share
our frustration with Apple's capital allocation policies,"
Greenlight said in an open letter to investors. "Apple has $145
per share of cash on its balance sheet. As a shareholder, this
is your money."
Einhorn said he suggested to Apple an initial preferred
share distribution, in which dividends could be funded on an
ongoing basis by a relatively small percentage of the company's
operating cash flow.
"Apple rejected the idea outright in September 2012," he
said, and then refused to withdraw the proposal to eliminate
preferred stock from its charter.
Some investors saw merit in Einhorn's argument.
"It's a great company but their greatest weakness is capital
allocation," said Mark Mulholland, portfolio manager of the $417
million Matthew 25 fund, which has some 17 percent of his
portfolio in Apple.
The California company had $137.1 billion in cash,
short-term and long-term marketable securities such as U.S.
Treasuries at the end of 2012, with over $94 billion of that
"This is something that we continuously assess, the
opportunities to both invest in the business and return cash,"
Apple's Oppenheimer said on the company's post-results
conference call last month. "We do consider increasing these
programs, and we'll do what we think is in the best interest of
It remains to be seen whether other major Apple investors
will get behind Einhorn's initiative.
Mulholland called the preferred stock idea "interesting and
unique." He also said he supported Einhorn's opposition to the
shareholder proposal and would vote against it, saying, "There's
no reason to put something like that in."
On the flip side, the California Public Employees'
Retirement System, which owns 2.7 million Apple shares, urged
investors earlier this week to vote in favor of the shareholder
proposal, and opposes "blank check" preferred shares.
Money managers have complained that Apple stockpiles
excessive cash and does a poor job putting it to work. The
weighted-average interest rate earned on its cash, cash
equivalents and marketable securities came to just 1.07 percent
in its 2013 fiscal first quarter and 1.02 percent in the 2012
Some questioned whether taking the company to court was the
right way to induce action.
"If you own the company you should let management have some
say in how they run it. I'm not a fan of using the legal system
to address what should be a corporate issue," said John Manley,
chief equity strategist at Wells Fargo Advantage funds.
Jeffrey Manns, an associate professor of law at George
Washington University, said Einhorn does have legal standing to
bring his case, even though it has little precedent.
Greenlight's lawsuit takes aim at what it calls the "bundling"
of several proposals into a single vote.
Greenlight wants the proposals separated so a vote can be
taken specifically on Apple's move to strike preferred shares
from its company charter. Greenlight alleges that Apple is not
complying with U.S. Securities and Exchange Commission rules
requiring separate votes for distinct and unrelated amendments
to the charter.
"This procedural legal strategy is merely a vehicle to raise
his profile and promote his agenda about shaping Apple's
corporate strategy," Manns said of Einhorn.
HISTORY OF ACTIVISM
Einhorn has a history of activism, usually directed at
struggling companies or those grappling with management issues.
In 2011, he urged Microsoft Corp to get rid of Chief
Executive Steve Ballmer, accusing him of being "stuck in the
past." Einhorn slashed his stake in the software giant six
Einhorn has enjoyed something of a cult following in the $2
trillion hedge fund industry ever since his bearish call on
Lehman Brothers in early 2008. But 2012 was not his best year.
Thanks to losses on Apple and in the gold market, Greenlight
Capital posted a modest 8.3 percent gain for the year after
losing 2.8 percent in December, a person familiar with the
fund's performance said. That lagged the S&P 500 index's 13.4
percent gain, excluding dividends.
"You could see Einhorn stirring up other activist investors,
to twist them. I would certainly applaud their efforts," said
Tim Lesko, portfolio manager at Granite Investment Advisors,
which owns Apple stock.