Memo to Apple: Ignore Carl Icahn

Today, once again, Carl Icahn issued an edict to Apple's (NASDAQ: AAPL  ) management to commence an immediate tender offer for $150 billion. In the letter, Mr. Icahn offers effusive praise, but requests immediate action.

We want to be very clear that we could not be more supportive of you, the existing management team, the culture at Apple and the innovative spirit it engenders. The criticism we have as shareholders has nothing to do with your management leadership or operational strategy. Our criticism relates to one thing only: the size and timeframe of Apple's buyback program. It is obvious to us that it should be much bigger and immediate.

Here's why Apple should take the advice of former CEO John Sculley and ignore Mr. Icahn.

Carl Icahn is thinking about the next 12 months, Apple is thinking about the next 12 years
Apple took a bold step in its October 22 event by giving its operating system, OS X Mavericks, away for free. In addition, Apple is also giving away its productivity suite, iWork, for free. In both tone and substance, this was Apple taking the opening shot at the 800 lb gorilla in the room, Microsoft's (NASDAQ: MSFT  ) Office. It is no secret that Microsoft has missed the mobile and tablet revolutions, but is still a cash cow due to its Microsoft business division that has provided over 50% of Microsoft's operating income over the last three years.

However, this won't be easy. Microsoft Office is the reference standard with businesses, universities, and end users alike. These network effects will be hard to overcome, and Apple will need a considerable war chest in order to compete.

Compare that to Mr. Icahn: In the last year he has entered into a heated argument with fellow investor Bill Ackman about Herbalife, abandoned his battle for Dell, and forced Nuance to adopt poison pill provisions. These actions all have something in common: They all appear to be focused on short-term gains, and not long-term operations.

A taste of Carl's own medicine?
Recent numbers have Mr. Icahn owning around 85% of the outstanding shares of his own company, Icahn Enterprises. You have to wonder how he would react if another investor took a sub-5% stake in his company and asked him to borrow money to initiate a buyback equivalent to his company's entire cash position. Of course, Apple has already authorized $60 billion in buybacks and had a $40 billion balance as of June. So it isn't that Apple isn't repurchasing, it just isn't as large and as fast as Mr. Icahn would like.

Tim Cook, in his classic collaborative style, has already met with Carl Icahn to discuss the size of the buyback. Many Apple fans bristled at this idea, thinking what Jobs' response to Carl's offer would have been.

Final Foolish thoughts
Apple has built an empire out of providing the best experience imaginable to its end users. However, both the smartphone and tablet markets are becoming more competitive. Apple should spend the money on research and development and keep its current capital allocation strategy in place. As far as Carl Icahn is concerned, ignore him -- he will exit this position shortly.

Splashing headlines aside, it's time to really learn about Apple
Apple has a history of cranking out revolutionary products... and then creatively destroying them with something better. Read about the future of Apple in the free report, "Apple Will Destroy Its Greatest Product." Can Apple really disrupt its own iPhones and iPads? Find out by clicking here.

Read/Post Comments (5) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 24, 2013, at 12:58 PM, dstb wrote:

    I don't think the key issue is about short or long term. It is about the fact that Apple has way more cash than it can use. The vast majority of the cash is held overseas and can't be brought back easily so borrowing against it when interest rates are at all time lows makes perfect sense. The amount can be debated but I agree it should be more than they are currently doing and the buy back should happen at a better pace.

  • Report this Comment On October 24, 2013, at 12:58 PM, TMFBWItime wrote:

    Great article man. Good perspective playing "what if" on having a minority investor doing the same with Icahn's own company.

    Nice to see your name popping up in the author box on more articles.

  • Report this Comment On October 24, 2013, at 1:09 PM, ComicInvestor wrote:

    Buybacks are a waste of money, especially when you have to load debt on to the company to make them. A debt-free company is obviously more free to innovate and is less subject to short-term investor/creditor whims. As a longtime investor, I'm much happier knowing that Apple has the resources to weather any economic storm and take on any competitor than getting a short-term stock price boost that only manipulators like Icahn can profit from.

  • Report this Comment On October 24, 2013, at 1:33 PM, TMFJCar wrote:


    Thanks for reading. I agree with you on some parts. First, the amount can be debated and shareholders of all sizes should have a voice here. However, the debate shouldn't be hijacked by one person that has an oversized microphone.

    I'm not for sure about the second one. Borrowing just because rates are low doesn't seem like a great strategy. Kind of sounds like what happened during 2005-2008 and we all ended up in the great recession. Icahn runs a finance firm, they are used to more debt on their books--Apple is a tech/manufacturing company. This can result in uneven profit cycles. You don't want to increase your fixed expenses--especially because rates are low (also, fixed income expenses are tax deductible anyway--making differences in interest rates a little less important).

    Thanks for reading

    Jamal Carnette

    TMFJCar--the author

  • Report this Comment On October 24, 2013, at 1:43 PM, rhealth wrote:

    "You have to wonder how he would react if another investor took a sub-5% stake in his company and asked him to borrow money to initiate a buyback equivalent to his entire cash position."

    What a jerk! I hope someone does this.

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