(Originally published here.)
It isn’t the first time the legendary investor has made money by publicly haranguing corporate executives for failing to do their jobs. In the old days, he and others like him would send critical epistles to directors and executives that would eventually find their way into the press. Today it’s faster and easier to peck a short message on a smartphone and within minutes set financial markets abuzz.
While it’s amusing to imagine an elderly billionaire having fun with a technology associated with the young, there are real lessons here about the uses and abuses of corporate cash.
In 1986, Harvard University’s Michael Jensen arguedthat public companies tend to waste money on empire-building acquisitions because it increases managerial pay and prestige at the expense of shareholders. Jensen recommended that activist investors force companies to improve returns by using excess cash to pay dividends and buy back stock.
Recent research supports this conclusion: Activists such as Icahn tend to make companies better. According to Icahn, the best way to get promoted up the corporate hierarchy is to be likable but unexceptional — the fraternity president who was always up for grabbing a beer but never seemed to find time to study. That suggests how he views Apple Chief Executive Tim Cook. (Another example is Dan Loeb, who is in the midst of trying to restore Sony’s former glory after having helped out Yahoo.)
Although Apple has been mismanaged differently than the typical 1970s U.S. corporation, Jensen’s argument still applies. Along with other tech giants, such as Google, Oracle and Microsoft, Apple has tens of billions of dollars in idle cash and short-term investments. Moreover, all of these highly profitable companies keep adding to their hoards, apparently because they have nothing better to do with the money. If there really is such a dearth of worthwhile investment opportunities, shareholders would be better off having the cash in hand to use as they see fit. People don’t own shares in tech companies to sit on their savings when they can easily put their money into mutual funds that only buy T-bills.
I am not in much of a position to judge whether shareholders will benefit more from Icahn’s plan to hand the cash over to shareholders or whether they would be better off listening to Slate’s Matt Yglesias, who recommends that Apple relocate from Cupertino, California, to Nebraska, among other things. I can say, however, that Icahn is supported by the finance academics.
Tim Cook might not like having to deal with Icahn, but those who own a stake in Apple — this includes everyone with exposure to the most common stock indexes — should be glad that this fabled investor is getting involved. And if Cook has any bright ideas, maybe he’s learned from Icahn how to let everyone know what they are.
(Matthew C. Klein is a writer for the Ticker. Follow him on Twitter.)