Einhorn successfully blocks Apple proxy vote in bid for preferred stock [u]

A U.S. federal court judge on Friday ruled in favor of David Einhohorn's lawsuit against Apple, effectively blocking an upcoming proxy vote that was slated to take place on Feb. 27.

Update: Judge Sullivan's ruling has been embedded below.

U.S. District Court Judge Richard Sullivan granted Einhorn's motion for a preliminary injunction against the upcoming shareholder vote, reports Reuters.

"This is a significant win for all Apple shareholders and for good corporate governance," Einhorn said, according to Financial Times reporter Tim Bradshaw.

Einhorn's Greenlight Capital sued Apple in early February over an issue of bundling more than one item into a proposition that would be up for vote at the company's annual shareholders meeting. Dubbed "Prop 2," the proposal contained an article that revokes the ability of Apple's board members to issue preferred stock, putting that power instead into the hands of shareholders. Einhorn is seeking the issuance of perpetual preferred stock, previously called "Greenlight Opportunistic Use of Preferreds" or "GO-UPs," that pay out higher than normal dividends, something that would be major hurdle if Prop 2 were to pass.

In a plea to shareholders on Thursday, the hedge fund manager floated the idea of "iPrefs," which would pay out a quarterly 50 cents dividend equating to $2 per year. He suggests Apple could extend and enhance the program over time to ultimately offer five iPrefs per share of common stock, doubling the current dividend rate to return some $47 billion of company's swelling $137 billion cash hoard.

"We don't know what Apple's plans are, but iPrefs don't interfere with Apple's using the existing cash hoard," Einhorn said.

For its part, Apple said Einhorn's idea only serve Greenlight's financial interests and does not take the public into consideration. CEO Tim Cook last week called the lawsuit a "silly sideshow"

"I find it bizarre we find ourselves being sued for doing something that's good for shareholders," Cook said. "I think it would be a lot better use of funds to donate that time and money to a worthy cause. You're not gonna see us do [shareholder] campaign mailing, you're not gonna see a "yes on 2" in my front yard. This is a waste of shareholder money, it's a distraction, and it's not a seminal issue for Apple."

It is not clear at this time how Apple plans to handle the ruling in regard to the shareholder meeting scheduled to take place in five days.

Greenlight Ruling by Mikey Campbell

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119 Comments

stelligent 2680 comments · 14 Years

About 11 years ago

This is going to be interesting.

applesupertramp 29 comments · 11 Years

Good, now where's my iPrefs.

solipsismx 19562 comments · 13 Years

I fucking can't stand this Einhorn. [VIDEO]http://www.youtube.com/watch?v=OdkqFM5hEfA[/VIDEO] [SIZE=0]http://www.youtube.com/watch?v=OdkqFM5hEfA&t=0m10s[/SIZE]

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The simple math behind David Einhorn's proposal:

First, what follows bellow does not in any way alter the intrinsic value of Apple. 1+1 does not equal something more than two. Einhorn's proposal simply forces the market to recognize the true value of Apple, Inc.

I'm going to add one twist to the Einhorn proposal and in doing so it will make his proposal easier to understand without altering the true nature of his proposal in any material way. Einhorn's original proposal without alteration is the more practical way, and again, I alter it solely in aiding its understanding.

The twist: Einhorn proposes that Apple issue preferred stock to existing common holders with a stated yield of say, 4% of par value. But, let's alter one aspect of that, instead of issuing the preferreds to common stock holders, let us have Apple issue them directly to the market. Par value will be 460 per share (same as common value when Einhorn's proposal was made public) and we will assume an equal number of preferred shares as the common shares. That is to say, the proceeds from the preferred issuance will equal the market cap of Apple or $430 billion (again, roughly at the time Einhorn's proposal was made public).

The Proposal: Apple issues $430 billion worth of preferred stock with a 4% yield and par value of 460 dollars per share. After issuance, Apple will have an additional $430 billion in cash which it will immediately pay out as a one time dividend to the common stock holders. That is, if you purchase one share of common today for 460 dollars, Apple will return to you 460 dollars of dividend tomorrow. Got that?

Now, where do we stand? You just received 460 dollars cash dividend for each share of common that you own. You still own the share, same as before, but now, Apple is obligated to pay from earnings to the preferred stock holders 17.2 billion dollars per year (that's 4% of the 430 billion dollars worth of preferreds).

If Apple's free cash flow is $32 billion per year (that's my number but feel free to use your own or to use GAAP annual earnings if you must), then after paying preferred dividends of 17 billion dollars, Apple will have 15 billion dollars in cash earnings per year left over for the common stock holder (32 billion - 17 billion = 15 billion).

That's 15 billion dollars in free cash flow. If we apply to that a more than reasonable P/E multiple of say 10 times, we produce a present value of 150 billion dollars (15 billion * 10). In addition to that, Apple still has 137 billion dollars in cash on its balance sheet and in the bank so to speak. To figure out what our common shares are worth, we need to add the 137 billion in cash to the 150 billion of present value from above. Both together equals 287 billion dollars in remaining value for Apple's common stock holders. If we have about 935 million shares, then the price per share for common after Einhorn's proposal is approximately 300 dollars per share. Got that?

To sum up the common stock, you received 460 dollars per share of cash dividend and in return were left with common stock worth approximately 300 dollars per share for a grand total of 760 dollars per share.

But surely there must be some chicanery here? No, not really. Like I said above, Einhorn's proposal merely forces the market to recognize Apple's true value. 1+1 still equals 2.

Oh, BTW, there is one thing to further consider, but neither Einhorn nor I will tell you what that is, and it is the main reason why his proposal was structured the way he structured it.

My suggestion: buy Apple stock. Hope Apple does what Einhorn suggest, but understand the value will not change materially either way. Einhorn's plan just forces the issue faster, and again, that one other thing...