3 Reasons Apple Inc. Overcame Carl Icahn’s Buyback Crusade

Why Apple triumphed against its most recent activist investor antagonist.

Feb 16, 2014 at 12:30PM

After months of headlines and hyperbole, tech giant Apple (NASDAQ:AAPL) has finally overcome perhaps its most well-known corporate antagonist to date – activist investors and multi-billionaire Carl Icahn.

Mr. Icahn's crusade against Apple initially surfaced last August when he informed the world via Twitter that he had amassed a large position in Apple.

Carl Icahn Apple Stake Tweet
Source: Twitter 

And this week, Mr. Icahn threw in the towel, saying his dogged pursuit against Apple had ended. So as this business-theater comes to an end, let's examine three reasons that Carl Icahn failed in his Apple arm-twisting effort.

1) Lack of support
With an estimated net worth in excess of $20 billion, Mr. Icahn's success as a financier is hard to dispute.

However, his particular brand of investing centers on bringing change to fruition sooner rather than later. At times, this can serve investors well. However, cajoling for short-term change also runs the risk of making short-term or ephemeral differences in a company's stock price at the expense of distracting from managing from the long-term.

Given Apple's shareholder base is comprised mostly of large, institutional firms  that will have to hold Apple's stock for better or worse, it should come as no surprise that Mr. Icahn's campaign for more immediate financial gratification fell on mostly deaf ears. And recently when two highly respected institutional investor advisors (Institutional Shareholder Services and Egan-Jones) formally recommended investors vote against Mr. Icahn's buyback proposal, it essentially signaled the end of his campaign.

2) Apple's sheer Size
Mr. Icahn's Apple escapades also illuminate another, less-discussed reason for his failure: Apple's sheer size.

The key ingredient to waging any successful activist campaign is gaining control over enough shares in order to exert your agenda. However, with a current market capitalization  the size of Belgium's economy, getting control over enough Apple stock to affect some kind of change is no small task.

Large, institutional money managers tend to avoid activist campaigns, leaving the bulk of activist investing to more maverick investors like Mr. Icahn. The problem is that such investors lack the kind of financial firepower needed to take on the Apples of the world. For example, if Mr. Icahn were to allocate every cent of his estimated net worth toward scooping up Apple shares, he'd only be able to control about 5% of Apple's stock.

Apple is simply too big a fish for the activist investing set, especially lacking the support of larger shareholders as we saw above.

3) $14 billion over two weeks quelled concerns
As most hopefully know by now, Apple has been especially active on the buyback front of late. In the two weeks alone following its disappointing earnings report, Apple scooped up some $14 billion of its own stock by accelerating its buyback program for the second time  in the last 12 months.

Although this falls well short of the total figure Mr. Icahn had been arguing Apple should allocate annually to buybacks, it certainly brings the Mac maker much closer to this figure. And more importantly, Apple demonstrating its willingness to put its money where its mouth is when its stock falls to absurdly low levels also serves as a key signal that Apple is committed to returning its massive cash hoard to investors as opportunistically as possible.

Where Apple goes from here
So as Apple heads into a product cycle in 2014 that should include at least one new product line, it's more of less back to business as usual with Icahn fading in the rear view mirror.

Apple's shareholder meeting convenes on February 28, so be on the lookout for more possible management commentary about how it plans to employ its massive cash hoard.

And as we head into Apple's next key event, we mark the close of what's been a very entertaining but ultimately fruitless pursuit from one of investing's most quote worthy characters.

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Andrew Tonner owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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