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AAPL action as investor threatens to sue and Apple issues statement

Karen Haslam | Feb. 13, 2013
There was some AAPL action after billionaire hedge fund manager David Einhorn of Greenlight Capital issued a press release stating that his company had filed a lawsuit against Apple, targeting a proposal by Apple to eliminate preferred stock from its charter. Apple then issued a statement saying it is willing to consider Greenlight's ideas, but the proposal isn't as bad as it claims.

Greenlight believes that such a move would be good for shareholders in the light of "the recent, severe under-performance of Apple's shares, which are down approximately 35% from their peak valuation, underscores the need for the Company to apply the same level of creativity used to develop revolutionary technology for its consumers to unlock the value of its strong balance sheet for its shareholders."

Greenlight also believes the market will appreciate a more "shareholder friendly capital allocation policy".

Einhorn's premise is that investors are not assigning the proper value to the $137 billion of cash on Apple's balance sheet, notes Business Insider.

In a separate report Business Insider writes: "Einhorn's plan does not actually create any new value for Apple or Apple shareholders. It's just financial engineering."

Apple responds to Greenlight

Apple issued a statement of its own in response to Greenlight's claims.

Apple went so far as to mention Greenlight in the statement, saying: "Apple's management team and Board of Directors have been in active discussions about returning additional cash to shareholders. As part of our review, we will thoroughly evaluate Greenlight Capital's current proposal to issue some form of preferred stock. We welcome Greenlight's views and the views of all of our shareholders."

Crucially, Apple claims: "Contrary to Greenlight's statements, adoption of Proposal #2 would not prevent the issuance of preferred stock."

The company explains that the proposal would only prohibit the issuance of such stock without a vote by shareholders.

Following the statement from Apple, the stock soared. Jumping from about $455 to $470 in just 20 minutes. This was the highest point for AAPL since the company reported its first quarter earnings on 23 January.

Apple shareholders will be free to vote with their feet on 27 February.

What could go wrong?

Business Insider is cautious. They write that: "If the market is behaving even remotely rationally, the market should therefore respond by knocking the value of Apple's common stock down by about $50 billion.

In other words, if Apple issued $50 billion of this new class of preferred stock tonight, the price of Apple's common stock should open tomorrow at about $400 a share."

Their reasoning is that "No matter how good a financial engineer you are, you can't just wave your magic wand and make something out of nothing.

The report suggests that by issuing preferred stock Apple would "befuddle mom and pop investors who won't take the time to understand that they now have a claim to less of Apple's assets than they did before".

Instead of issuing new preferred stock, Apple should just significantly increase its regular dividend, says Business Insider.

 

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