Rotten Apples?

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Upper West Side Apple Store in NYC
Upper West Side Apple Store in NYC. David Einhorn, hedge fund manager of Green light Capital sued the company asking to distribute its cash holdings of $137 billion to investors and to block the buyback of its preference shares at a low price. Photo-Matt Buchanan

It seems the Apple’s problems are here to stay. From the countless lawsuits against its competition being thrown out of the courts, to its products being under pressure from the dog eat dog world of tablet PCs, the company cannot catch a break. Now it seems that it might have a lawsuit to answer on its own with David Einhorn, hedge fund manager of Green light Capital, suing the company. The lawsuit entails that Apple should distribute its cash holdings of $137 billion to investors and to block the buyback of its preference shares at a low price.

The disadvantage to the investors would be that they would not be part of the dividends due to them by the company and they would have to sell back their shares at a lower price. The investors feel that they are being exploited for the good of the company and the situation can be rectified with a considerable return to the investors before they are forced out of the company. The last few months have been tumultuous to say they least for the technology giant which has to face tumbling share price, mounting competition in the market and the lack of an ability to keep its innovative conveyor belt churn out unique products.

The iPhone 5, and the new iPad mini has failed to make an impact on the market like their predecessors did. Einhorn termed this mentality as Depression era thinking where it was collecting cash to insulate itself from an impending market gloom that is being forecasted in the future. The ideology seems like a call to the past for a company who is used to playing it risky and taking chances into territories no one ventures into. The example from the 1990s would still be fresh in mind where Steve Jobs brought it back from near bankruptcy after the company hoarded some cash in order to fund its creative machinery.

The battle taking place now between Apple and Einhorn is centred on the fact that Apple wants to keep holding onto cash while buying back compulsory part of its equity consisting of preferred stock. Einhorn, on the other hand, wants Apple’s shareholders not to vote for the proposal as it is squeezing out some of its investors by exploiting them and to rather issue more stock. Apple contends that its share price has been plummeting 3% in the last 4 months and this will send a strong signal to the market. Einhorn is still long for company but feels that things have to be addressed regarded its surplus cash and that the company can afford to pay off its dividends right now.

He feels that the company is holding onto too much cash which can weigh it down when the excess can be used to pay of its investors in a considerable manner right now. The timing of the lawsuit could not be any worse for the company as it is fighting tooth and nail in order to regain its lost credibility both in the eyes of the customers and shareholders and it seems that this lawsuit would be another black mark on the reputation. Einhorn still feels that most of the cash being retained by the company is the property of the shareholders and it should be paid back to them. He feels that an option on the table of a new share issue in the future protects the company from any cash flow needs of the future and the company unlocks more value by paying dividend right now.

On the other hand, Apple feels that the value of the preferred stock will become uncertain for the future if Einhorn’s proposal is used and that it is much cheaper to hold onto its cash for any situation that might take place in the future. They would rather want to hold onto this cash and reinvest it back into the company, growing it further and paying it back to the shareholders with a better return. The end decision lies with the shareholders who will vote on this on the 27th of February.

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