Einhorn vs. Apple: The Value of Activist Investors
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The Fiscal Times
February 26, 2013

Billionaire hedge fund manager David Einhorn of Greenlight Capital scored at least a temporary legal victory late last week in his spat with Apple (NASDAQ; AAPL) over what the company should do with its mountain of cash – some $137 billion, at last count.

This battle illustrates clearly why activist shareholders like Einhorn are a thorn in the side of corporate managers – and, perhaps, the value they can sometimes bring.

Apple began paying out dividends on its common stock last year, and the plunge in Apple’s share price from its highs above $700 at the end of last summer to $443 now has driven the dividend yield up to 2.35 percent.

That’s a respectable yield. What isn’t respectable, Einhorn has been arguing, is that Apple should hang on to so much cash, which is simply sitting there idly. If the company can’t find a worthwhile way to put the proceeds of all those iPads and iPhones to work devising its next hit product, then it has a duty to its shareholders to give the money back to them in the form of dividends. That argument is likely to win him adherents from among the ranks of shareholders who have suffered as the stock price has declined steadily, and as margins on those iconic products have begun to dip as well.

It seems as if Richard Sullivan, a U.S. district court judge in Manhattan, believes that Einhorn should have the right to make his case – or at least, that Apple shouldn’t push forward with a plan that would create an extra barrier to what Einhorn is proposing. Had Apple had its way, shareholders would have been asked to vote later this week on a measure that would bar the company from issuing this kind of special, high-dividend yielding stock that Einhorn has dubbed the “iPref” without explicit shareholder approval.

In other words, Apple wanted to make it more difficult for its corporate managers to oblige Einhorn. Sullivan’s injunction now means that vote won’t take place at the company’s annual meeting on Wednesday.

Publicly, Apple CEO Tim Cook has dismissed Einhorn’s action as a “silly sideshow”; privately, I can just imagine him sticking a photo of Einhorn to a dartboard and using it for target practice. Einhorn’s outspoken criticism of Lehman Brothers, which began in late 2007 and revolved around allegations of questionable accounting practices that masked the investment bank’s actual losses on illiquid mortgage-backed securities, probably gave the top brass at Lehman conniption fits, if not ulcers.

Annoying corporate managers is what activist investors like Einhorn do – and in the case of Lehman Brothers, Einhorn hit the nail on the head, as became clear less than a month after he first publicly discussed his thesis. Ultimately, these individuals are just big investors who because of their size and/or track record have earned a kind of bully pulpit.

With the resources at their command, they can delve more deeply into companies in search of managements that are underperforming, businesses that aren’t properly structured or business models that they believe are outdated or ill conceived. In other words, they challenge the status quo that it is in the vested interest of corporate CEOs like Apple’s Cook to praise unreservedly.

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When they do this, they’re not doing anything illicit. (All right, I admit that some of them can cross a line when they start spreading rumors about companies, hoping to drive down the value of the stock and enabling them to walk away from a short sale with a profit.) Sure, they like to stir up trouble and make money for themselves in the process. But why not? Isn’t that the same brand of capitalism that a company like Apple has profited from by launching its iTunes digital store and wreaking havoc on old ways of selling music? Ultimately, the activists aren’t doing anything more than the rest of us should be doing: pushing for more and holding CEOs and their underlings accountable.

Of course, it doesn’t mean that the activists are infallible – although some of the hedge fund managers who are the biggest activist investors out there may have such gargantuan egos and inflated net worth that they themselves may be confused on this matter. We shouldn’t blindly follow David Einhorn any more than we should reverently listen to Tim Cook. It’s in the tug of war between activists and corporate CEOs that new ideas and strategies can emerge and new voices can be heard.

One final note: All this doesn’t mean that an activist investor is a good proxy for aggressive investigations by regulators; the ongoing fight over Herbalife – is it or isn’t it a pyramid scheme? – should be resolved by the SEC, not by activist investors Carl Icahn and Bill Ackman fighting it out on television.

Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.