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Einhorn's demand for Apple's cash masks the real problem

There was a time when investors were dazzled by Apple Inc. because of its innovative products, big market share and high profit margins. Now, they're more interested in the company's cash.

As in, they want it – and David Einhorn, the influential hedge fund manager who leads Greenlight Capital, is now making his demands very public.

In a release that coincides with legal action, Mr. Einhorn said that Greenlight is "dissatisfied with Apple's capital allocation strategy." And in a subsequent interview on CNBC, he added some colourful details: Apple, he said, has a "Depression-era mentality" that reminds him of his grandmother's overly conservative approach to her finances.

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It is no secret that Apple has been accumulating an enormous cash stockpile in recent years. It grew to a whopping $137.1-billion (U.S.) at the end of 2012, up 13 per cent in the fourth quarter.

To put that into perspective, Apple's piggybank alone is worth more than 97 per cent of the companies within the S&P 500 – and it has inspired all sorts of daydreams about the number of Honda Civics, gold bars and NFL teams the company could buy.

Mr. Einhorn just wants Apple to start returning the money to shareholders. But rather than raising the dividend Apple reinstated last year or buying back shares, he wants the money returned in the form of high-yielding preferred shares – say, with a 4 per cent yield and an unlimited lifespan.

A perpetual preferred stock, he argued, "would be distributed at no cost to Apple's existing shareholders, and would provide an attractive, sustainable dividend while preserving Apple's financial resources to pursue its business strategy."

A promise to issue preferred shares would boost the value of Apple's common stock, he argues.

"Greenlight believes that Apple has the capacity to ultimately distribute several hundred billion dollars of preferred, which would unlock hundreds of dollars of value per [common] share," he said in the release – more if the market recognizes Apple as a shareholder-friendly company and drives up the stock's low price-to-earnings multiple.

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This is where he is butting heads with the company: Apple wants to eliminate preferred stock from its charter, in a proposal that will be voted on near the end of February.

Any investor who has watched Apple's share price slump 35 per cent over the past five months is no doubt happy to see someone rush to their defence – even if Apple shares failed to react to Mr. Einhorn's ideas. (The share price was unchanged in afternoon trading onThursday, but shot up after Apple said it would evaluate Mr.Einhorn's proposal and that changes to its charter would not prevent theissuance of preferred stock. Shares closed up nearly 3 per cent.)

But there is something distressing about the focus on Apple's cash, especially now that the company's share price has fallen so sharply from its record high.

Apple's problem isn't its cash. Rather, its brand leadership is slipping at the same time that its profit growth is slowing. Other smartphone makers are producing popular gadgets to rival the iPhone – a trend reflected in the relative strength in the share prices of Research In Motion Ltd., Nokia and Samsung Electronics Co. Ltd.

As rivals catch up, Apple has failed to unveil anything particularly new, raising concerns that its iPod-iTunes-iPhone-iPad winning streak is nearing an end.

If investors want excitement, they should pin their hopes to a television set from Apple – a product that has been talked about but not yet seen – or perhaps the feeling that this company has plenty of other innovations in the pipeline.

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Mr. Einhorn says he is upbeat about Apple's prospects – he likes chief executive Tim Cook and says the business is doing well.

But his focus on cash suggests that the company's biggest asset isn't its ingenuity but its balance sheet. If he's right, investors should be worried.

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