David Einhorn's Financial Engineering Can't Save Apple From This Big Risk
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David Einhorn has a message to Apple (NASDAQ: AAPL): unleash the cash.
It's a noble goal from one of the world's best investors. Einhorn's influence could be enough to push current Apple CFO Peter Oppenheimer into surrendering at least some of the company's $137 billion cash horde to its rightful owners.
But what it won't do is save Apple from a bigger danger: wasting all its money.
Einhorn's plan relies on financial engineering whereby Apple surrenders half of its current annual operating income to preferred shareholders each year. In exchange, the current common shareholder would receive Apple preferreds with a face value of $500.
The preferred issuance does two things: it drains some of the company's future earnings while leaving it with all the cash it has today.
Apple vs. Microsoft
Technology companies are well known for making ridiculous acquisitions when cash piles mount. Let's not forget Microsoft's first ever quarterly loss in 2012 when it wrote down a $6.3 billion acquisition of a no-name ad company, aQuantive.
That certainly wasn't Microsoft's (NASDAQ: MSFT) only bad acquisition. The Seattle-based company makes real money from only two products – Office and Windows – and wastes it on everything else.
Of course, Apple isn't Microsoft. Apple doesn't have a track record of wasting shareholder's cash on acquisitions. But it has gotten more aggressive. The company tinkered with the idea of a so-called “strategic investment” in social media company Twitter just last year, undoubtedly at a multiple that would destroy tremendous shareholder value given just how cheap Apple shares trade to forward earnings.
Unlike a dividend recapitalization with borrowed money – one which would allow Apple to pay a dividend without paying taxes on its foreign cash – preferred stock issuance come with no covenants. Apple will still have complete and 100% control over the $137 billion in cash it keeps on the balance sheet. It can spend that money however it sees fit, even if that includes value-destroying acquisitions.
Investors should welcome Einhorn's activism. Apple does have too much cash on the balance sheet. But investors need to be certain of his plan. It won't restrict Apple from wasting shareholder money, nor will it necessarily create cash value for investors. Preferred stock won't safeguard Apple shareholders' wealth from financial mismanagement like a large one-time special dividend from a dividend recap.
Apple shareholders should push for an immediate return of cash, not a hodgepodge of financial engineering that doesn't protect investors from spend happy managers.
valuemagnet has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!