The Weakness Revealed by Apple's Stock Buy Back

Stock buybacks are supposed to be signs of management's belief in a company's future prospects. Such purchases are allegedly an indication that investing in one's own people, products and services is going to produce a higher return than any other opportunity available to the enterprise in question.

And that is certainly how Apple CEO Tim Cook has attempted to spin his announcement that after a year of relentless pressure from notoriously short-term oriented hedge funds and greenmailers, he had approved the purchase from its own cash reserves of $14 billion of Apple's shares.

And what do you know? The stock went up! How awesome for all those like Carl Icahn whose business is, in Wall Street parlance, 'talking their own book.' Which means buying into a stock that is lower than their calculations or beliefs lead them to think it should be and then rattling their figurative sabers until management blinks and does something, anything to at least partially answer their criticisms by eking out the desired increase. This sad spectacle is conducted in hopes the critics will be satisfied - usually at the behest of financial advisors who collect one fee for the advice and another for managing the buyback.

As children have learned in school yards since time immemorial - and as the world learned in Poland in 1939 - bullies are never satisfied by such pathetic displays of weakness. It convinces them that the opportunity they perceived for future gains was right. And they will push for more until someone stands up to them.

But the truly destructive aspect of Apple's decision is that it confirms everyone's secret worst fear: that the company really doesn't have anything magical left in the pipeline. That all it can offer is an endless series of iterative line extensions and minor enhancements to existing products which competitors are already matching or even surpassing in terms of features and/or price advantage. So that rather than investing in bold new products that challenge the world's imagination, Apple will become another 'widows and orphans' stock, as Microsoft became over time, a safe buy for those in need, reflective of an enterprise content to live on the reputation - and cash flow - generated by its past glories rather than its future potential. JL

Mark Berniker reports in CNBC:

"It's troubling for Silicon Valley, if short-term activists interfere with the long-term strategy of some of America's most innovative companies,"

For months, Carl Icahn has been pushing Apple CEO Tim Cook to use the company's $158 billion war chest to buy back company shares, and hopefully substantially boost its stock price.
But not every Apple shareholder agrees with that strategy, and at least one big one doesn't appreciate Icahn's activism.

"It's the tail wagging the dog. [Icahn's] recent letter was rambling and contradictory," says Anne Simpson, senior portfolio manager of investments and director of corporate governance for the California Public Employees' Retirement System.
CalPERS is the largest pension fund in the United States with more than $285 billion in assets under management, and it owns close to $1.6 billion in Apple shares.


"There are owners, raiders and traders. We're an owner and have been of Apple for a very long time. Mr. Icahn is a raider and he's an echo chamber who engages in megaphone diplomacy," Simpson added.
Simpson's comments come as Carl Icahn tweeted that he "just bought $500 mln more $AAPL shares. My buying seems to be going neck-and-neck with Apple's buyback program, but hope they win that race." With his most recent purchase, Icahn's Apple holdings are roughly worth $4.1 billion.

CalPERS is not the only Apple shareholder who's doesn't think Ichan's call for a buyback is good for the company, or its stock.
"It's not always in the shareholders best interest for the cash hoard to be returned to shareholders," said Matt Patsky, CEO of Trillium Asset Management, which owns 44,000 Apple shares worth more than $20 million.
"Apple is resistant to depleting its cash reserve and they have that right," he said.
Several calls to Icahn were not returned.
Icahn has repeatedly urged the company to put its cash hoard of $158 billion to use by buying back an additional $150 billion of its own stock. Apple in May say it would return $100 billion to shareholders over three years, through a combination of stock buybacks and a quarterly dividend of $3.05 per share.
Apple CEO Tim Cook rejected Icahn's proposition during a dinner last September, which the activist investor called "testy."


Simpson called Icahn's ideas about Apple's future product strategy as "not clear." She said CalPERS isn't counting on Icahn to provide a vision of what Apple needs to do with future products like Apple TV and the potential iWatch.