Shareholder activist David Einhorn has made headlines in recent weeks arguing that Apple Inc. (NASDAQ:AAPL) can unlock shareholder value by issuing $236 billion in preferred shares. But this financial engineering doesn’t create any new wealth, and actually harms the company in the long-term. Apple shareholders should dismiss Einhorn’s ‘silly slideshow’ and ignore these types of financial shenanigans.
Einhorn’s proposal is to create a new class of preferred stock that would be distributed to existing shareholders, paying a 4% dividend indefinitely. Einhorn believes this plan could unlock $150 billion in shareholder value. But let’s put on our i-Banker suits and see how the proposal would work in theory.
The value of a business is determined by the company’s future cash flows discounted by an appropriate interest rate.
Here’s how Apple is roughly valued today.
The problem with Apple Inc. (NASDAQ:AAPL), in Einhorn’s view, is that the company is sub-optimally financed by expensive equity. Investors discount future cash flows at a high rate, reducing the value of the firm.
Preferreds are advantageous because they’re cheaper to issue than equity. Preferred shareholders will accept a lower return because yields are fixed and they’re first in line to receive any dividends.
By issuing $236 billion in preferreds, Apple Inc. (NASDAQ:AAPL) can reduce its cost of capital, lower the rate cash flows are discounted, and increase the value of the firm.