Why Icahn & Einhorn Are Betting on Apple Stock
Apple Inc. (NASDAQ:AAPL) has enormous short-term potential, but it’ll take the iron will of Carl Icahn to unlock it. The returns on AAPL stock could be absolutely monstrous if Icahn unlocks Apple’s cash reserves, which is why he and David Einhorn, another billionaire investor, are buying up tons of Apple stock.
David Einhorn is the founder and president of Greenlight Capital LLC, a hedge fund through which Einhorn accumulated nearly $2.0 billion in wealth. Carl Icahn is the famous activist investor (or corporate raider, depending on whom you ask) who founded Icahn Enterprises L.P. He recently sold his shares of Netflix, Inc. for a cool $2.2-billion profit.
Now Icahn has taken a huge position in Apple. As an activist investor, he’s usually out to fix something that he thinks the company’s management is doing wrong. Since he’s made billions of dollars with this strategy, companies usually listen to what he has to say. Well, that plus Icahn buys a big enough stake in the firm to strong-arm them.
Currently, Icahn owns 0.5% of all AAPL stock, which may not sound like much, except that it’s worth roughly $3.3 billion. Clearly, Icahn is betting big on tech firm. (Source: “Carl Icahn creates $150 million Super PAC advocating enormous tax cut for Carl Icahn,” Vox.com, October 21, 2015.)
Likewise, through his hedge fund, David Einhorn upped his stake in the stock by more than 50%; his shares are worth about $1.33 billion. (Source: “Greenlight Capital Form 13-F Filing,” Securities & Exchange Commission, November 16, 2015.)
How Carl Icahn Can Force Apple to Pay Dividends
Apple is sitting on more than $205 billion in cash reserves. Most of that money is stashed away in overseas accounts, far from the prying hands of Uncle Sam. Although keeping its cash abroad has saved Apple a lot of money in tax payments, it has also hurt its stockholders.
Apple can’t reinvest that money into research, pay dividends, or buy back stock while it sits outside of U.S. borders. The company’s intellectual resources are housed at Apple headquarters in Cupertino, California; repatriating its cash reserves would result in too much money lost to taxes.
That’s how things stand right now, but Carl Icahn plans to change that momentarily. Icahn is a really clever guy. He knows that Apple’s stock is too vast and diluted to be able to bully the company into paying more dividends, which is what he really wants.
So instead, Icahn plans to tip the scales so that Apple would choose to pay more dividends. There’s a subtle, but important difference there. Icahn started a super PAC (political action committee) that is lobbying Congress to enact a tax holiday for overseas earnings. He put $150 million into the super PAC’s war chest. (Source: Ibid.)
If Icahn’s super PAC is successful, Apple could repatriate its cash at a reduced tax rate. Right now, Icahn’s share of that cash is about $900 million. From that amount, Apple would have to pay $315 million in tax to bring Icahn’s cash back to the U.S., but that’s under normal circumstances. With the reduced rate he’s lobbying for, Apple could save up to $243 million on Icahn’s share of the money alone. (Source: Ibid.)
When Icahn has orchestrated such huge savings for Apple, it would look irresponsible not to bring back the money. If successful, Icahn will have forced Apple’s hand by making the deal irresistible, rather than by strong-arming the company.
Einhorn and Icahn Will Get Richer Off Apple Stock
Both Icahn and David Einhorn are already wealthy men. In fact, they are part of the 0.01% of all Americans who we hear about so often. Yet, they will substantially increase their wealth if Icahn’s super PAC succeeds at unlocking Apple’s cash reserves via reduced taxes.
And there’s absolutely nothing wrong or sinister about that. Icahn is making the case that a company like Apple, which has created thousands of skilled jobs and generated a lot of value in the world, should be able to continue doing that. If it means it gets one day to bring the cash back at a reduced tax rate, well then, so be it. At least the money won’t be sitting in an Irish bank account, collecting dust.
It’s encouraging that Einhorn doubled down on Apple stock. He clearly thinks that Icahn is going to succeed, proving yet again that the smart money is betting on AAPL stock.