Icahn plans Apple changes

Apple investors ploughed more cash into the beleaguered toy maker after it was revealed Carl Icahn was planning to do a number on the company.

Investors thought that Icahn shoving lots of cash into the company was a good thing indicating that all was well. But Icahn has a track record of buying up shares in troubled companies and forcing them to improve profits for shareholders.

Note the difference here.  While it might be good for an IT company to release new products, often what is best for shareholders is for companies to release more dividends.  This sometimes means giving up long term projects and profits in favour of a quick buck.

Icahn planning to do some kind of shareholder stirring sent stocks to a six-month high and boosted the company’s market value by $12 billion to $444.8 billion.

Icahn, who was dubbed a “fox in the henhouse” by former Yahoo chief executive Jerry Yang, said his firm had taken a “large position” in the company.

The word on Wall Street is that Icahn has about a $1 billion stake in Apple. This means that Icahn would have made about $50 million with him just announcing his involvement.

He said he believed the company was extremely undervalued and he had a meeting with Apple CEO Tim Cook on Tuesday afternoon.

Sure enough, he said that he was going to press Apple to increase its stock buyback, in which the company purchases its own shares in a bid to boost its value.

But it is not as if Apple has not been buying back its own stock.  In April the outfit pledged to spend $60 billion buying back its stock until 2015. So far it has bought $18 billion. Apple also plans to pay out more than $10 billion in shareholder dividends each year.

But Icahn said Apple “has the ability to do a $150 billion buyback now by borrowing funds at three per cent”.  In other words, get itself into debt to boost the share price.

He thinks that if it does that then shares should trade at $700 each. This sort of mentality is not what made Apple’s shares overvalued in the first place. That was managed by hype and an expectation that Apple would continue to make record profits.  Last September there was talk of the shares being worth $1,000 each.  That was before common sense took over.  

Still getting yourself into debt to boost share prices is not something that Apple would have traditionally done.  In the long term it will mean that Apple has less cash to invest in new projects and will become much more pedestrian in its approach.