Thursday, October 24, 2013

Carl Ichan's Advice in the Age of Ben Bernanke

Below is a fascinating letter from billionaire investor Carl Ichan to Apple CEO Tim Cook. Ichan, in the letter, demands that Cook have Apple immediately borrow $150 billion to use to buy back Apple stock. Note well: In the letter, Ichan uses in his calculations to prove the soundness of this move the fact that Apple will be able to borrow the $150 billion at 3%. But how will Apple be able to borrow at 3%? Only because Ben Bernanke and the rest of the Fed members are keeping downward pressure on rates by mad money printing.

Austrian economics teaches that it is these types of interest rate manipulations that distort the savings/consumption structure of the economy. It is, for example, helping fuel the current stock boom. But, eventually this type of mad money printing/interest rate manipulation results in accelerating price inflation. At that point, the Fed slows its money printing, interest rate soars, the buy backs don't work at the higher interest rates and the stock market crashes.

Dear Tim:

It was a pleasure meeting you for dinner at the end of September. When we met, my affiliates and I owned 3,875,063 shares of Apple. As of this morning, we owned 4,730,739 shares of Apple, an increase of 22% in position size, reflecting our belief the market continues to dramatically undervalue the company, even when taking into account the recent market appreciation, which in turn makes our proposal unchanged with respect to a $150 Billion buyback. We were pleased to hear at our dinner that you appreciated our input and that you would speak to us again in three weeks to continue the dialogue. In anticipation of doing so soon, we aim to reiterate in this letter the point of view already expressed to you directly with the hope of effectively summarizing it for the company’s board of directors and our fellow shareholders.

From our perspective, Apple is the world’s greatest consumer product innovator and has one of the strongest and most respected brand names in history. We consider Apple to be our most compelling investment. I first informed my followers on Twitter on August 13, 2013 of my “large position.” I also expressed to you my opinion that “a larger buyback should be done now.” At that time, we owned 3,448,663 shares and the stock price was $467. Since then we have purchased an incremental 1,282,076 shares (bringing the total value of my position to $2.5 Billion) and we currently intend to buy more.

We want to be very clear that we could not be more supportive of you, the existing management team, the culture at Apple and the innovative spirit it engenders. The criticism we have as shareholders has nothing to do with your management leadership or operational strategy. Our criticism relates to one thing only: the size and timeframe of Apple’s buyback program. It is obvious to us that it should be much bigger and immediate.

When we met, you agreed with us that the shares are undervalued. In our view, irrational undervaluation as dramatic as this is often a short term anomaly. The timing for a larger buyback is still ripe, but the opportunity will not last forever. While the board’s actions to date ($60 billion share repurchase over three years) may seem like a large buyback, it is simply not large enough given that Apple currently holds $147 billion of cash on its balance sheet, and that it will generate $51 billion of EBIT next year (Wall Street consensus forecast).

The S&P 500 trades at roughly 14x forward earnings. After backing off net cash, Apple trades at just 9x (not factoring into account that the company has a significantly lower cash tax rate than the rate Wall Street analysts use). This discount (cash adjusted) becomes even more compelling given our confidence that Apple will grow earnings per share at a rate well in excess of the S&P 500 for the foreseeable future. With such an enormous valuation gap and such a massive amount of cash on the balance sheet, we find it difficult to imagine why the board would not move more aggressively to buy back stock by immediately announcing a $150 Billion tender offer (financed with debt or a mix of debt and cash on the balance sheet).

While this would certainly be unprecedented because of its size, it is actually appropriate and manageable relative to the size and financial strength of your company. Apple generates more than enough cash flow to service this amount of debt and has $147 billion of cash in the bank. As we proposed at our dinner, if the company decided to borrow the full $150 billion at a 3% interest rate to commence a tender at $525 per share, the result would be an immediate 33% boost to earnings per share, translating into a 33% increase in the value of the shares, which significantly assumes no multiple expansion. Longer term (in three years) if you execute this buyback as proposed, we expect the share price to appreciate to $1,250, assuming the market rewards EBIT growth of 7.5% per year with a more normal market multiple of 11x EBIT.

It is our belief that a company’s board has a responsibility to recognize opportunities to increase shareholder value, which includes allocating capital to execute large and well-timed buybacks. Apple’s Board of Directors does not currently include an individual with a track record as an investment professional. In my opinion, any further delay in executing the buyback we hereby propose will reflect this lack of expertise on the board. My firm’s success and my expertise as an investor would be difficult for anyone to argue. Per my investment thesis, commencing this buyback immediately would ultimately result in further stock appreciation of 140% for the shareholders who choose not to sell into the proposed tender offer. Furthermore, to invalidate any possible criticism that I would not stand by this thesis in terms of its long term benefit to shareholders, I hereby agree to withhold my shares from the proposed $150 Billion tender offer. There is nothing short term about my intentions here.


Carl Icahn
Chairman, Icahn Enterprises (IEP)

Do you think Ichan understands that it is because of Bernanke money printing that he is able to write such letters?

Here is an Ichan tweet from a month ago:


  1. You bet he understands. And probably he's clever enough to cover up how much he knows, to toss out red herrings from time to time, and to envelop his enemies in smoke lest they figure out too soon what he's up to. In fact, it would not surprise me in the least to discover that he is a regular reader of material such as The 48 Laws of Power.

  2. So here is a MAJOR stockholder recommending that the company do a buy-back, thus pumping the stock price higher and making Icahn a shitload of money. Nice work if you can get it.

  3. There is no good reason for why a company's share price should rise after a share buy back. Yes, the number of shares is reduced, but so is the book value of the company (it spent real cash for absolutely nothing, since the shares it bought will be removed from the total number outstanding and thus have zero value).

    As an example, say that a company with net assets of $10B is valued by the market at 1.5X book value, for a market capitalization of $15B. If there are 1.5B shares outstanding, each share is worth $10. If the company decides to do a $3B buyback, it will eliminate 0.3B shares, leaving 1.2B shares. But these shares are covering ownership of a company that now has net assets of $7B. Assuming that the market decides the company is still worth 1.5X book value, the remaining shares would now be valued at 7B*1.5/1.2B=$8.75, or less than what they were before the buyback. Yes, there are other factors, especially anticipated future earnings, but surely future earnings potential will be dimmed by a significant drain in present liquid assets that could have been used for expansion?

    Since this is wall street, there is also the psychological factor to consider. If a company decides to buy back a significant number of shares, that signifies that it no longer views itself as a strong growth investment, since it is no longer investing in its own operational growth. Apple's value is based in large part on its percieved continued ability to grow faster than the rest of the economy, and if a share buy back (in particular, the events that make the board decide to do a buy back) shakes that perception, then the PE multiple should actually fall further, leading to little or no share price appreciation from the buy back. We merely have to look at Exxon, which has bought back over a hundred billion dollars of shares in the past decade, with price appreciation nevertheless falling short of its peers.

  4. Apple has $147B in cash sitting aside, earning zero. Borrow $150B at 3% and increase shareholder value- no brainer!

    When that $150B can be used to buy more IP, and add wonder Ichann is pissed!