There is something very populist about an investor demanding a cash-rich company like Apple Inc. return money to shareholders – heck, it’s their money. But Greenlight Capital’s David Einhorn, an influential hedge fund manager who is suing Apple over this issue, might not have as much support as you might think.
Mr. Einhorn announced on Thursday that he was battling Apple over its $137-billion (U.S.) stockpile of cash. He argues that by holding onto the money, Apple isn’t being shareholder friendly; it should distribute the cash by creating preferred shares that will pay an ongoing dividend, starting at 4 per cent. The move should even boost the value of common shares, he believes.
But Barry Ritholtz, also an Apple investor and author of the Big Picture blog, has blasted this line of thinking as being short-sighted and terribly self-serving for so-called activist investors.
“David Einhorn is a great investor (and a nice guy), but he joined the Apple party somewhat late, and suffered a setback last year with the rest of shareholders once the law of big numbers set in,” he said.
He is referring to the recent setback for Apple’s share price. After hitting a record high in September, it has since slumped about 35 per cent – a minor ding for long-term investors who have seen Apple rise to the world’s largest company, based on the value of its shares, but a significantly bigger hit for anyone who bought near the peak.
But more than an accusation of sour grapes, Mr. Ritholtz is also standing by Apple’s decision to hold cash – okay, a lot of cash – as a sound strategy for long-term survival and growth. Cash helps a company through lean years if it misses shifting technology trends, meaning that it has its defensive uses.
It also helps position a company for opportunities, either with acquisitions, the creation of new divisions or, well, super-secret plans.
“Technology is a fast moving sector of the economy, where trends shift quickly and alliances change overnight,” Mr. Ritholtz said. “Having a cash hoard gives Apple maximum flexibility to deal with this for their future.”
His advice for how Apple should handle investors like Mr. Einhorn? “For legal reasons, they should hear what these activist shareholders are suggesting, giving them a thorough hearing out, with all attendant chin stroking and ‘Hmmm, interesting’ – prior to ignoring them.”