Icahn’s $150B Apple Gambit Could Transform The Management Of Cash-Rich Tech Giants

In April Apple announced that it would boost its share repurchase program from $10 billion to $60 billion, as part of a $100 billion effort, executed with cash, set to conclude by the end of calendar 2015. That represented a $55 billion increase on its formerly announced shareholder return efforts.

In Apple’s estimation, it would return about $30 billion yearly to shareholders over the course of the expanded program, calculating that rate with a starting point of August 2012. Apple has issued a dividend for just over a year, at current date.

The company now returns over $10 billion to investors yearly in the form of dividends.

Some investors are not content, including everyone’s favorite eccentric uncle of dollars, Carl Icahn. Having amassed a nearly $2 billion stake in Apple, Icahn recently had dinner with the company’s CEO Tim Cook. His pitch: A $150 billion buyback. The pair are set to discuss the idea in a few weeks.

Note that Icahn wants $150 billion in share buybacks alone and not in total return. The $90 billion delta between Apple’s current share buyback program and what Icahn wants is stunning, as it is a figure 150 percent greater than Apple’s already recently expanded program’s promise.

Presuming that Icahn expects Apple to pull off his $150 billion in share repurchases in the same time frame as the company had previously intended to buy back a mere $60 billion, it would boost the company’s per-year return cost for shareholders from $30.03 billion yearly to $57.06 billion, a near doubling.

Cost

Can Apple afford the expense? The Wall Street Journal reported today that Apple completed its most recent quarter with $146.6 billion in cash. In that quarter, Apple had a net profit of $6.9 billion, and cash flow of $7.8 billion. Assuming that Apple generated that same amount of cash for a year, it would only total $31.2 billion.

So, at Icahn’s proposed rates, the company would be forced to dip deeply into its cash position to execute the buyback. Why would he want Apple to greatly lower its cash stash (aside from enriching his investment, naturally)? He thinks that Apple’s stock is undervalued, and therefore it’s a prime time for the company to buy more.

Buy when the share price is cheaper than its value, and you remove stock from the market at a more efficient rate.

Apple currently trades for $488 per share. Icahn, in an interview with CNBC, said that Apple would still have low “multiples” at $630 per share. In his view, it would be “absurd” to not buy more stock now.

Assuming 10 quarters between now (including the current fiscal quarter, of course) at $7.8 billion per, Apple would generate $78 billion in new monies available for use. That tacked onto its current cash position of $146.6 billion, and Apple has a theoretical cash chest of $224.6 billion. Icahn wants to use $190 billion of that. That would put Apple’s (back of a vodka-stained napkin in charcoal pencil) cash position under the $35 billion mark. It would be odd for Apple to not be richer than Croesus.

Still, we’re discussing Apple removing around one-third of its total market capitalization off the market. That’s a sea change in its investor position.

Impact

If Apple is swayed by Icahn, it would set a precedent by which even rich buyback and dividend programs enacted by wealthy technology companies could be viewed as at-risk from a corporate perspective. Microsoft, for example, is under similar pressure from an activist investor of its own: ValueAct. That investor is parlaying 0.8 percent stake in Microsoft into a board seat and perhaps larger shareholder return. Google has tens of billions in cash, as well. Cisco, Oracle, even perhaps Facebook could be on the dock if they continue to perform.

In short, the age of tech companies running massive cash surpluses as weapons that can be used both offensively and defensively could be winding down. Apple could draw down its cash position from $146.6 billion to $35 billion in just over two years. Get ready for some balance sheet bingo.

Fact: Companies love cash cushions. It provides latitude to buy any rival they fear, and make long-term bets that would be infeasible at lower rates of accumulated wealth.

Icahn is not making a small claim: His buyback program totals more dollars than Apple’s entire current cash position.

And he might get it, too.

Top Image Credit: Mike Deerkoski