There's been a lot of discussion recently about institutional shareholders lining up on the same side of the table as activist hedge fund investors making demands on companies they may view as underperforming. (See my articles of 10/3/13 and8/21/13.) Finally, here's an example of institutions not only aligning against activists, but actively supporting the company against activist demands. Are institutions now starting to reverse course?
Of course, I'm talking about Apple's battle with Carl Icahn, who had proposed (in a nonbinding proposal) that Apple increase the level of its stock buybacks by $50 billion. As reported in these articles from the NYT and WSJ, today, after increasing opposition from New York's comptroller (who runs five pension funds), Calpers and even ISS, Mr. Icahn withdrew his proposal. In what was perhaps a face-saving gesture, in announcing the withdrawal today, Mr. Icahn suggested that his pressure on the company had already accomplished his goal: "We see no reason to persist with our nonbinding proposal, especially when the company is already so close to fulfilling our requested repurchase target…."
These institutions argued that Mr. Icahn's plan put too many restrictions on the company's management and board. According to DealBook, the NYC comptroller said that "he thought Apple was in a better position to determine its financial future than one outspoken activist investor." In an interview reported in another DealBook piece, the comptroller said that "'I strongly believe this proposal is unnecessary, risky and shortsighted….It's easy to get a quick financial hit off a large company, but I think it's a lot harder to plan for the future." Reportedly, when Mr. Icahn withdrew his proposal, the comptroller posted a celebratory Twitter message. Perhaps just as surprising, ISS told subscribers that "[t]he board's latitude should not be constricted by a shareholder resolution that would micromanage the company's capital allocation process."
While we can't know precisely what private discussions took place between Apple's board and management and the various institutions, we can certainly speculate that engagement must have played a positive role in enlisting these institutions to support the company so actively. Perhaps another factor may have been the financial impact of the company's buybacks to date. The WSJ Heard on the Street column contended that "buybacks aren't making the best use of Apple's resources, even if they helped Apple in its most recent period deliver its first quarter of earnings-per-share growth after four straight declines…. Little wonder, since the return on Apple's stock purchases isn't great. Looking at the $14 billion of stock the company bought back on the open market in the last three quarters of 2013, the return to date, excluding dividends, is less than 8%.... Granted, not much time has elapsed. Yet with Apple's actual business generating an average return on invested capital of 28.6% in fiscal 2013, according to FactSet, the company's efforts at financial engineering pale in comparison….Having spent nearly $4.8 billion on research and development in the last calendar year, Apple clearly has new products in the hopper. Those are what will drive higher returns, not a campaign to appease Mr. Icahn." Similarly, in a letter that the comptroller sent to investors, he argued that combining Apple's existing program with the new proposal could force the company to either borrow funds or retrieve some of its overseas cash holdings (and pay taxes on the repatriated amounts). "It's very important that we give this company some financial cushion as they put new products on the market and continue to innovate," the comptroller said.
In the end, whether institutions see Apple as a unique case or whether they are now becoming more reluctant to jump on the activist bandwagon remains to be seen.