Published October 28, 2013
In a recent interview, Carl Icahn essentially threatened Apple (AAPL) chief executive Tim Cook and the tech giant’s board with a possible proxy battle if they fail to launch a $150 billion stock buyback – far and away the biggest in history – that’s sure to net the activist investor a sizeable fortune.
If you’re in any way curious how one guy – one investor who owns just 0.5% of the most valuable technology company on planet Earth – has the stones to do that sort of thing and get away with it, allow me to explain.
There’s a very good reason why activist investors and hedge fund managers wield the kind of leverage they do, and it has everything to do with the way companies are run these days. Here are five simple questions every CEO and board should ask themselves – and answer as honestly as I do here.
1. Are most public companies well run? Lots of companies are well run, lots of companies are poorly run, and there’s everything in between. I’d say the quality of executive leadership follows a typical Gaussian distribution curve, meaning there’s plenty of room for improvement.
2. Are most public boards of directors effective at corporate governance and acting in the best interest of shareholders? If you call rubber-stamping everything that’s put in front of them “effective,” sure. Otherwise, no, probably not. Again, lots of exposure out there.
3. Do institutional investors care? Not really. Most have a three-pronged strategy to deal with this sort of thing: Diversify, Diversify and Diversify. Big banks and mutual funds own much of corporate America and they make money no matter what.
4. Do retail investors like you and me feel like they’re getting the shaft? Pretty much. Indeed, we are.
5. Does that create a mammoth opportunity for hedge fund managers and activist investors like Carl Icahn to rally the troops, threaten proxy wars, and get industry giants to do their bidding? Absolutely.
As Phil Robertson likes to say on Duck Dynasty, “Now we’re cooking with peanut oil.”
You see, it’s all too easy to write off folks like Icahn as greedy, self-interested money managers who are only out for short-term gains that don’t benefit the companies they invest in one bit.
I wish that were true. I wish companies were so well run that guys like Icahn couldn’t take a position in the company, meet with the CEO, tell him exactly what he needs to do to be better at his job and benefit shareholders, and actually be right.
That’s not the case with Apple – and we’ll get to that in a second – but it has been true of many of Icahn’s past investments. Motorola and Yahoo (YHOO) come immediately to mind. Icahn was dead-on in his assessment that former CEOs Ed Zander and Jerry Yang and their respective boards weren’t cutting it, or something to that effect.
While I do find Icahn’s latest incarnation as the Robin Hood or King Arthur of shareholder rights (pick your medieval metaphor) fighting the tyranny of bad corporate leaders to be more than a little over the top, the truth is that lots of CEOs and boards could use a little shaking up. And some need more than a little.
Granted, Icahn’s goals are certainly not as altruistic as his new website declares (in all caps, no less): “THE SHAREHOLDERS’ SQUARE TABLE (SST) IS A PLATFORM FROM WHICH WE CAN UNITE AND FIGHT FOR OUR RIGHTS AS SHAREHOLDERS AND STEER TOWARDS THE GOALS OF REAL CORPORATE DEMOCRACY.”
Corporate democracy? Please.
But, in many cases, he is filling a need. That’s many, not all. Take Apple for example. Icahn said himself that he has no problem with the way Cook and his management team are running the company. He just thinks the board lacks the financial acumen to realize that borrowing $150 billion so he can line his pockets with greenbacks is a no brainer.
Not only is it not a no-brainer, it is, in my opinion, a spectacularly bad idea for three very good reasons I’m sure Tim Cook understands:
1. That’s a scary amount of debt to carry around on a balance sheet, even if it is Apple’s balance sheet. And while the company does have the cash to back it up, the vast majority of it – $100 billion or so – is tied up in offshore accounts that Apple can’t repatriate without getting hit with a prohibitively large tax burden.
2. While Apple may be the biggest, baddest company in the high-tech jungle, that can change in a heartbeat. The industry is notoriously fast-paced and volatile. Just 15 years ago Apple was nearly bankrupt. One product cycle miss and the subsequent drop in market share and profit margins would make your head spin.
3. Since Icahn admits that Cook and company are doing a great job running the show, the last thing you want to do is distract them from the mammoth task of innovating, developing, making, and marketing the world’s most exciting products and services against brutal competitors like Google (GOOG) and Samsung. All so shareholders can get a short-term pop that won’t benefit the company’s long-term competitive position one bit.
Bottom line: The $60 billion share repurchase that Apple already has in the works sounds just about right to me. Going one penny higher introduces unnecessary risk with no long-term strategic benefit. It’s as simple as that.
The truth is that Carl Icahn is a monster of corporate America’s own creation, and a formidable one, at that. To that extent, mediocre or dysfunctional executives with their rubber-stamping boards and out-of-control pay packages should be on notice, and that’s a good thing.
But well-run companies like Apple should not and cannot give in to what amounts to corporate extortion. To do so would not be in the best interest of their shareholders. Granted, the threat of a proxy battle is an unwanted distraction, but in the case of Apple, I seriously doubt if it would come to that because, on this one, the company has it right.