If there is one problem that we all wish we had, it would be to have too much cash. That problem that is at the root of hedge fund star David Einhorn's suit against Apple (AAPL 2.15%). The crux of the case is a dispute over how Apple should best deploy the staggering stockpile of cash that it has, and continues to, amass. In a recent press release, in addition to trying to clarify its position over the brewing proxy battle, the company references both the $45 billion it is trying to return to investors over the course of three years and the $23 billion in cash flow from operations it generated last quarter. That is correct: quarter, not year. Like I said, it is a problem we'd all like to have.
One of the more interesting aspects of the case is that as the story of Einhorn's lawsuit broke, shares spiked in late trading ahead of the bell. While it is hard to imagine a company having too much cash, and I applaud Einhorn's suggestions, the market seems to have remembered that behind the shares that have dropped 35% from their high is a huge pile of money. Not too much, but maybe just enough to get the stock back on track.
What's Einhorn's beef?
Einhorn, founder of Greenlight Capital, alleges in his suit that Proposal 2 on Apple's recent proxy statement would "restrict the board's ability to unlock the value on Apple's balance sheet." The hedge fund manager has apparently had several conversations with both CEO Tim Cook and CFO Peter Oppenheimer in which the Apple executives were strongly urged to issue preferred shares of Apple stock rather than simply returning cash through a share buyback. He urged Oppenheimer to issue $50 billion of preferred shares that would carry a 4% annual dividend yield; the Apple executive asserted that Einhorn's calculations were inaccurate and that the shares would carry an 8% dividend under the structure, which was too high.
The matter was finally taken to Cook who, according to Einhorn, was essentially unfamiliar with the issues in play. The company has remained opposed to the suggestion without being hostile. This did not, however, prevent Apple from placing Proposal 2 in its proxy statement -- the proposal would make shareholder approval a necessary step for the company to issue preferred shares. Rather than heeding the advice of one of its biggest advocates, Apple seems to be seeking to actively block his suggestion.
Apple responds
In response to the suit filed in New York's U.S. District Court, Apple issued a statement in which it tried to clarify its position vis-a-vis the proposal on preferred shares:
Contrary to Greenlight's statements, adoption of Proposal 2 would not prevent the issuance of preferred stock. Currently, Apple's articles of incorporation provide for the issuance of "blank check" preferred stock by the Board of Directors without shareholder approval. If Proposal 2 is adopted, our shareholders would have the right to approve the issuance of preferred stock. As such, Proposal 2 has the support of many of our shareholders.
While Einhorn acknowledges that the company would still have the ability to issue preferred shares on a more restrictive basis, he believes that the creation of an "extra hurdle" is unacceptable. So, as so many Americans do when things go the wrong way -- meaning contrary to their wishes -- Einhorn filed suit. Despite the ongoing discussions with the company, he claims that the pending annual meeting on Feb. 27 is too close to wait any longer.
Why you should care
Ultimately, I agree with the position taken by Fool analyst Andrew Tonner, who believes that while Einhorn's suggestion is unlikely to carry the day, it calls attention to how favorably priced the stock is at current levels. The company is one big product away from rocketing back to greatness and a significantly higher stock price. Even if that product does not come, or is slow to, the company is sitting on so much cash that it is hard not to like your chances with the name anyway.
Even with the late-day pop, the stock carries a 2.3% dividend yield, a P/E ratio of 10.6 and the title of largest technology company on earth. With the strong cash flow data, a huge correction under its belt, and no lack of upside, Apple shares look attractive.
