Business

Apple Vulnerable to a New Array of Activists

In 2013, Carl Icahn took over the world’s largest company. Activist built 1% stake in Apple, closed “comical” hoarded cash, demanded $150 billion worth of stock buybacks, and threatened to force a shareholder vote.

He is respected by the market and the company. Apple stock rises when he buys shares and falls when he sells. CEO Tim Cook feels obligated to dine with the company’s veteran frontrunner and listen to his point of view.

Not all of these are money. Icahn believes Apple will make televisions in 2016 and cars in 2020. He has strangely specific: TVs will be 55 and 65 inches. No such product has appeared.

But his main takeaway is this: the stock is ridiculously undervalued, trading at a substantial discount to the S&P 500 despite Apple’s record of steady growth and strong earnings. strong.

P/e forward line chart from Icahn stock to now shows Apple's journey towards premium stock

This is no longer the case. Apple was only worth $424 billion when Icahn revealed his initial $1 billion position. Its market capitalization crossed $3 billion this week and now trade at a large premium on the index.

Icahn did not reap the benefits. Citing concerns about Apple’s prospects in China, he exited in 2016. He made $2 billion from the transaction but would have made tens of billions if he kept it.

Part of the reason for the increase is that Cook has successfully shifted its revenue structure from hardware like the iPhone to software and services, which are more reliable and more profitable.

But he also issued cash. Although Icahn’s buyout application was not followed in the letter, Apple did significantly increase shareholder payouts. The company paid a dividend for the first time in 2013. It now returns more than $100 billion a year to shareholders.

Apple founder Steve Jobs was envious of protecting the world’s largest corporate piggy bank, threatened by near bankruptcy in the 1990s. But breaking into it helped boost the company’s valuation. company higher, providing a higher layer of protection.

Any activist who tries to follow Icahn today will find profits lifted. Buying 1% shares may seem out of reach, never mind amassing enough shares to really power the board.

But other things have changed since 2013. Size matters less if an activist has a solid track record or trendy themes. Activists at Engine No 1 had a small stake in ExxonMobil but won over larger shareholders to force changes to the company’s emissions policy.

Oddly enough, Apple seems more vulnerable to activist pressure than it was during Icahn’s time. A host of new activists are buying small stakes and using them to push shareholder resolutions. A sympathetic new Securities and Exchange Commission is facilitating this, allowing resolutions to be introduced when officials could have previously helped the company disqualify them from the vote.

On Thursday, Apple announced proposals to be put to a vote in March. These include six shareholder moves that range from banning gag provisions against discriminatory employees to increasing transparency about how the company removes apps from its App Store.

These entities pose a much more complex challenge than yore’s cash needs. Worse for Apple: its largest shareholders can no longer be relied upon to bolster the company’s direction. It was enough to make Tim Cook yearn to have dinner with Carl Icahn.

tom.braithwaite@ft.com

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