Billionaire investor Carl Icahn is stepping up his investment and shareholder activism, most recently taking aim at Apple and eBay. For some time now, Icahn has been pressuring Apple and Tim Cook to increase its shareholder buyback program, asking for $150Bn at one point. Icahn’s investment group, Icahn Associates, said Wednesday that it has increased it’s position in Apple to $3.6Bn (still less than 1% of outstanding stock). Apple says it already has increased its dividend and stock buyback program to $100Bn in 2013.
Companies typically initiate stock buyback programs when they have excess cash and believe their stock is undervalued. Purchasing stock in the open market reduces the outstanding shares, thereby increasing revenue/earnings per share. Depending on the return on cash, which is small due to historically low interest rates, the benefit of simply keeping the cash on the books is likely low. Assuming valuation multiples stay the same, the stock price should, in theory, go up. This is the claim Icahn is making. Since he currently owns $3.6Bn worth of stock, he would benefit greatly by an increased buyback program (and/or dividend distribution). However, companies often like to have large cash positions. It allows them to make significant investments and bets on future growth, while having a cash hoard capable of buying any potential company or competitor (several timesover maybe) with added cushion.
With eBay, Icahn is suggesting a different corporate action — spinning off the PayPal subsidiary. As you would expect, the eBay Board has rejected this suggestion and says that it is constantly evaluating ways to increase shareholder value, including spinning off various assets. Strategically, says eBay CEO Donahue, the eBay platform serves as a cheap way for PayPal to acquire new merchant customers. eBay also helps fund PayPal’s growth through investments and provides transaction data that helps risk management. Fundamentally, separating PayPal from eBay would go against the belief that payments and commerce are moving closer, not further apart (as demonstrated by what is happening at both Amazon and Square on both ends of the spectrum). From a financial standpoint, many would argue that PayPal is the more valuable asset at eBay, contributing 40% of revenue and 50% of profits, but more importantly growing faster than the Marketplaces division. Spinning off PayPal would leave eBay with its slower growing Marketplaces and stagnant Enterprise group.
Taking a step back, there seems to be a growing trend to target large technology companies’ cash positions. Aside from Icahn and Apple, we’ve seen this from ValueAct and Microsoft. Given mounting cash by the likes of Oracle, Facebook, and Google, we wouldn’t be surprised if shareholders start to voice for dividend distributions or more aggressive buyback programs. As for spinoffs, it does sometimes make sense (see VMWare and EMC) and can unlock value for assets trapped in larger corporate entities, but in this case it doesn’t seem to make a lot of sense.