Apple Needs To Hang Up The Next Time Carl Icahn Calls

Enough already. Carl Icahn may be 18th on the Forbes 400 list of the richest Americans and his recent investment track record is fantastic. But the guy holds a lousy one half percent of Apple's stock and has just about the single most useless idea imaginable to try to improve the company for the long haul. For reasons that are not clear, Apple CEO Tim Cook is indulging this loudmouth, having eaten dinner with him the other night. Icahn told Cook Apple should spend $150 billion buying back its own stock. This remains one of those romanticized notions: That you "return cash to shareholders" through share buybacks, you reduce the share count, earnings per share rises and the stock jumps along with it. It all seems sound, except it pretty much never works, it makes little sense for Apple, and by even having the conversations with Icahn, Cook is skating on thin ethical ice for no particularly good reason.

Absent Icahn, Apple is already in the process of buying back $60 billion worth of its own shares, a staggering sum. The agitation from Icahn is predicated on two critical things (1) that Apple still has $147 billion, 10% of all the corporate cash held by U.S. firms (2) that something positive should happen to the share price if Apple spends all this cash on its own shares. The "logic" works as follows. Apple buys shares at an average of perhaps $500 (it can't reasonably spend $150 billion without having some affect on the price in the short run). That retires around 300 million shares, or about 1/3 of the total outstanding. Not only does Apple's earnings per share rise by that third, but it's dividend cost falls by billions as well. The roughly $4 billion in saved dividends will be critical, it turns out, because while Apple has enough cash to buy all the shares Icahn wants, most of the money is overseas and so Icahn proposes borrowing rather than paying the giant tax bill on the foreign cash. The dividend savings very approximately pays the interest on the $100 billion Apple would need to borrow.

So if you're clear on the scheme then: Burden the company with $100 billion in debt for the purpose of raising actual cash flows not at all. You end up with a financial measure -- EPS -- improved by one third and massively reduced flexibility to do anything else with that money.

The idea that this achieves something is very much debatable. What it certainly doesn't do is solve any of the problems Apple allegedly faces with regard to long-term competitiveness: Declining margins, whether it can have a product that's as big a hit as the iPhone ever again, et al. Even the alleged financial benefits rarely materialize: "[M]ost of the buybacks by the S&P 500 over the past eight years have not yet added much value for remaining shareholders," according to a Credit Suisse study.

In the short run, though, Apple has an "optics problem." Icahn is certainly a great investor, but he's irrelevant with respect to Apple. He's not among the top 25 shareholders. He promised he wasn't going to engage in a proxy fight but those weren't exactly words of disarmament but rather the words of an unarmed man. If his claim of $2 billion in Apple stock is true, he's holding less than 0.5% of what's outstanding. The only reason he has an audience with Cook right now, is because the CEO is allowing it.

And why is confounding. Icahn says their meeting was "cordial" but eventually got "testy." Whatever went down, it was either so immaterial as to have been better handled on a 2-minute phone call or teetered on the edge of the kind of unequal disclosure that the SEC frowns upon. What I mean here is not that Cook did anything wrong, but the mere idea he should be meeting with Icahn and telling him anything at all interesting would violate Regulation FD, which calls for all material disclosures to be freely shared with all shareholders. Let's assume Cook stayed safely on the right side of the rules. So why meet with Icahn at all? Tell him his suggestion has been received, Apple is already buying back plenty of stock, will evaluate continued opportunities to do so in the future and thanks for your time.

The fact that Icahn claims this conversation is going to resume in 3 weeks makes it look even worse. Surely Cook understands what Icahn wants and can easily calculate the alleged value of it in his head. He's doubtless reminded Icahn that a decade of buybacks at Cisco and Microsoft have seen their stocks literally go absolutely nowhere and arguably have signaled to the world that those companies best days are behind them. (If he hasn't, consider that done now.) The last time a hedge fund guy came along, David Einhorn of Greenlight Capital, Apple basically blew him off, announced it buyback, and presumably put this issue to rest for a couple of years. But that couple of years ended in less than a couple of quarters and Icahn is getting a much lengthier audience than Einhorn did, even though the former had an innovative idea -- although it was still just financial engineering, nothing fundamental about the company.

Every time Icahn and Cook talk, the impression is that Icahn is hearing something the rest of the world hasn't had a chance to. He certainly gives that impression by taking to Twitter and making it seem like these conversations are important. Apple surely knows that it can't tell Icahn anything you and I don't already know, so it's time it stop talking to the guy. Cook is busy anyway. He has new iPods to launch, iPhone production to ramp up, and a whole host of other important things to work on. None of them involve listening to some guy whose sole interest is in financial engineering the company. Enough already.

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