One of the more high-profile instances of an activist investor pushing for change was when Carl Icahn put the pressure on Apple (NASDAQ: AAPL) . The billionaire head of Icahn Enterprises successfully pushed Apple to boost its share repurchase program to return capital to investors.
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This podcast was recorded on Oct. 21, 2016.
Dylan Lewis: I think "distraction" cues us up perfectly for a discussion on some cons for activist investors. When you said distraction, the first thing that came to mind for me was Carl Icahn and Apple. It seemed like, when he had a stake in that company, every two months we were seeing a new valuation.
Evan Niu: And a new letter.
Lewis: "I think shares are worth $900!" It was just every day in the news, that's what they were talking about. That becomes kind of a nuisance for management.
Niu: It is. I think, in Icahn's case, he's kind of a ruthless activist investor. He had a big position, and of course, a big position in Apple means 2% or 3% of the company.
Lewis: Yeah, I think he was just under 1%.
Niu: Yeah, it's single digits. There's no way that anyone is buying 10% of Apple.
Lewis: Which is tens of billions of dollars, for that position.
Niu: Yeah, no one has the money for that. I think, in Apple's case, the specific thing that he was gunning after, which was this really big push for capital returns ...
Lewis: Via buybacks.
Niu: Right, buybacks and dividends. I think that was a very valid cause, because Apple had been getting criticized for years about that. Their cash position had grown ridiculously large, unjustifiably. You can't justify having that much cash. Again, as a public investor, you're just sitting there, and you're like, "Guys, come on, you have way too much cash." But a public investor can't do anything about it. That's not to say that Apple doesn't know better. I think Apple was just being stingy at the time, choosing to do that. They had already started a buyback program, but Icahn came in here and really pushed them to make it bigger and really meaningful. Of course, they didn't listen to exactly what he said. But I think he was successful at getting them to increase it, in which case, it's definitely a good thing for investors, because otherwise, investors have no recourse to get Apple to start giving back all this money that's just idly on the balance sheet doing nothing, earning really crappy returns.
Lewis: And his pitch was basically, "Shares are criminally undervalued and you have all this cash. You should be buying back shares." I think the number that he threw out there was a $150 billion share-repurchase program.
Niu: Something like that.
Lewis: We've seen, in the last couple years, I think he began his position in 2013 and exited in 2015, he had about a two-year holding period. During that time, we saw the company acquiesce to that a little bit, and decide, "We're going to be buying back shares at a pretty significant clip." It obviously wasn't to the extreme that he'd been hoping for.
Niu: I think, right now, they have bought back about $120 billion, so far, total. Which is a pretty crazy number in itself. That's a megacap company. They just bought back a megacap company. But, I think, in the example of this cash thing specifically, having too much cash really does affect some of your financial metrics, too. Think about, for example, return on assets. If you have all this cash just sitting out there, and your asset number is humongous ...
Lewis: And you're not returning anything on that.
Niu: Right, and you're not giving back to shareholders, then your net income ratio to your assets is now smaller. So, your return on assets, return on equity, all these important financial metrics that investors look at to judge the performance of the company are now being artificially deflated because you have a ridiculous amount of cash, and that cash is not doing anything. So, there are a lot of meaningful ways this impacts things. Beyond, when they start to buy back, then you get earnings creation. I think he did a good job in terms of really getting them to do something that needed to be done that was holding them back.