How biggest Apple advocate Einhorn became a sharp critic

Hedge fund star manager David Einhorn was arguably Apple Inc's biggest cheerleader on Wall Street with a stake worth about $600 million and an oft-cited prediction that the company's market value would hit $1 trillion some day.

So it was a shock on Thursday when Einhorn announced that he was suing Apple to get it to deploy its $137.1 billion cash pile more effectively and arrest a 35 percent drop in its share price from a record high logged last September.

Unknown to Wall Street, Einhorn had for months been imploring Apple's chief financial officer, Peter Oppenheimer, to have the company issue dividend-paying preferred shares to reward investors and juice the stock price.

Einhorn told Reuters he felt blindsided when he received Apple's January 7 annual proxy statement and saw that it contained a proposal that would make it more difficult for the company to issue preferred stock.

"We saw that the proxy came out and we saw they were planning to get rid of preferred and then we said, 'Wait a minute, we are not going to be able to bring this up again in a good way if we allow them to do this. So we should contest it now,'" Einhorn said in a phone interview.

Einhorn's $8 billion Greenlight Capital Inc on Thursday sued Apple in U.S. District Court in New York, asserting that its Proxy Proposal 2 would "restrict the board's ability to unlock the value on Apple's balance sheet.

The 44-year-old hedge fund manager, who made his name and fortune by predicting the collapse of Lehman Brothers, is also urging Apple shareholders to vote against the proxy proposal at the company's annual meeting on February 27.

Apple said in a statement that it will evaluate Greenlight's recommendation and denied that its proxy proposal was aimed at preventing the issuance of preferred stock. If Proxy Proposal 2 is adopted, Apple said it could still issue preferred stock as long as it obtained approval from shareholders.

But the extra hurdle, from Einhorn's point of view, was unacceptable and so he took the matter to Apple CEO Tim Cook.

The way Einhorn tells it, Cook was more receptive than his CFO and the two sides are still talking. But Einhorn decided to file suit anyway because of the approaching annual meeting.

"The lawsuit is just to get the proxy sorted out," he said.

Long on Apple
Einhorn began investing in Apple in 2010 and holds 1.3 million shares worth about $600 million at current values.

He emerged as a prominent advocate for the stock after it began to fall last year following some disappointing quarterly results, stiffer competition in the smartphone market, and product snafus that fueled fears Apple had lost its innovative edge following the death of co-founder Steve Jobs.

Einhorn said in a letter to investors last month that Greenlight had taken advantage of the drop in Apple's shares to buy more stock in the fourth quarter. That was one reason the fund posted a negative return of 4.9 percent in the quarter.

Since May last year, Einhorn has been urging the company to unlock several hundred billion dollars of shareholder value by distributing preferred stock, which he favored over a share buyback because it did not deplete cash immediately.

In private conversations with Oppenheimer, Einhorn said Apple could initially distribute $50 billion of perpetual preferred stock with a 4 percent annual cash dividend paid quarterly at preferential tax rates.

But, according to Einhorn, Oppenheimer and his advisers calculated the dividend to be 8 percent, which they deemed too high.

"We said, that's crazy. That's crazy. We think 4 percent. If we're wrong, maybe it's 4.5 percent or 4-1/4 percent - it is not 8 percent. So, we kind of agreed to disagree. We kind of sat on it for a few months," Einhorn said.

When he eventually took the matter to Cook, Einhorn said he felt that the CEO did not know all the details of Einhorn's discussions with Oppenheimer.

"When I discussed this with Tim Cook, and actually, the conversation has been going on for the last couple of weeks, he said that he wasn't familiar with my previous conversations with Peter Oppenheimer and whoever Peter Oppenheimer's advisers were. I was surprised by that.

"I think we got the brush-off the first time," Einhorn said about Oppenheimer and his advisers. "I don't know what the communication was" between Oppenheimer and Cook.

Apple declined to comment on the specifics of the discussions with Einhorn.

A source familiar with the matter characterized the interaction with the hedge fund manager as "cordial," saying that there had been "friendly disagreement" only on whether common shareholders should be allowed to vote on something as significant as an issuance of preferred stock.

Near death experience
Einhorn said in a television interview that despite their differences, he felt Cook was doing an excellent job as CEO, but he described Apple's management as having a "Depression-era" mentality that led it to hoard cash and invest only in the safest, lowest-yielding securities.

"In other words, people who have gone through traumas...and Apple has gone through a couple of traumas in its history, they sometimes feel like they can never have enough cash," Einhorn said on CNBC.

Cook and Oppenheimer both joined Apple during the turbulent late 1990s when the tech company was struggling to stay afloat and before Steve Jobs engineered a sensational turnaround with products like the iPhone and iPad that became must-haves for consumers around the world.

Oppenheimer later earned a reputation on Wall Street for extreme conservatism in cash management. The company likes to remain liquid by investing in safe but low-yielding U.S. Treasury and agency debt, shies away from big acquisitions, and repeatedly preaches a "capital preservation" mantra to investors.

Under Cook in 2011, Apple gradually loosened the reins, announcing its first multi-year dividend and share repurchase programs.

Einhorn and Apple will have another bout when they air their arguments on February 22 in court. Before then, the outspoken fund manager will be lobbying other shareholders.

Analysts say one benefit of preferred stock is that up to 80 percent of the dividends can be tax-free for corporate investors, although preferred shares tend to be less liquid than ordinary shares or bonds.

"The idea is powerful and when I have a chance to explain it to the shareholders, most will see it as an enormous win-win," Einhorn said.

© Thomson Reuters 2013