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Icahn offside in call for bigger bite of Apple

You've got to hand it to Carl Icahn. He knows when to take his dividends and go home. And he even manages to pat himself on the back on his way out the door.

The corporate raider who has profitably recast his image as an activist investor watching out for shareholders' best interests is abandoning his attempt to squeeze more cash out of Apple Inc.'s overflowing coffers. One of the reasons: a negative response from proxy adviser Institutional Shareholder Services Inc., whose recommendations carry a lot more weight with pension funds and other big institutional players than anything Mr. Icahn has to say.

Another evaluator, Egan-Jones, also rejected the billionaire's proposal, which meant he had no chance of attracting enough support for his demand for a further $50-billion (U.S.) stock buyback. It's scheduled to come up for a vote at the annual meeting Feb. 28.

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"We see no reason to persist with our non-binding proposal, especially when the company is already so close to fulfilling our requested repurchase target," Mr. Icahn wrote in a letter to other shareholders Monday. "We are pleased that Tim [Cook, Apple's chief executive officer] and the board have exhibited the 'opportunistic' and 'aggressive' approach to share repurchases that we hoped to instill with our proposal."

Yet Mr. Icahn, who owns close to $4-billion worth of Apple stock, was still agitating for a bigger buyback until it became clear the big institutions were not on board.

"Standing outside and lobbing a brick through a window really is not a sensible way to engage in the conversation," Anne Simpson, a senior investment manager with the California Public Employees' Retirement System (Calpers) told CNBC last Wednesday. "We don't think Carl Icahn, who's a relatively small investor with a very short-term agenda, should be steering the board of Apple."

Ouch. Mr. Icahn actually owns more shares than Calpers. And he was expressing a familiar lament heard by just about every large publicly-traded tech company with torrents of free cash flow. Microsoft faced similar pressures a decade ago, leading to a $30-billion buyback, a doubling of its dividend and a special payment of $3 a share. At the time, Microsoft had about $56-billion in cash.

Apple has nearly triple that amount. And Mr. Icahn isn't alone in wanting a heftier part of that hoard distributed more quickly than the company would like. ISS agrees … to a point. But the agency notes that the tech giant recently repurchased $14-billion of its own stock, bringing the total above $40-billion in the past year – with more to come this year and next.

Apple "has returned the bulk of its U.S.-generated cash to shareholders via aggressive stock buybacks and dividends payouts," ISS said in its report. "In light of these good-faith efforts and its past stewardship, the board's latitude should not be constricted by a shareholder resolution that would micromanage the company's capital allocation process."

That's the crux of the problem. Investors grow restive when companies pile cash up to their rafters. Experience has shown them that executives with access too much excess capital are liable to do silly things with it, like ill-advised acquisitions or excessive compensation packages.

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But tech companies like Apple operate in a volatile industry, need vast amounts of cash to cover research and development tabs, as well as the expenses associated with entering new businesses or markets and the occasional strategic acquisition. Apple has never spent huge bucks on other companies. But a big cushion means being able to fail, sometimes spectacularly, on the road to the next iPhone without endangering the company's financial health.

It's a tricky balancing act. Apple's co-founder Steve Jobs liked to keep as much cash in the vault as possible. If investors didn't like it, they could always hit the "sell" button.

His successor, Mr. Cook, is trying to stake out a middle ground, one that both the company and Mr. Icahn can live with. His approach is a sensible way to balance investors' desire for immediate rewards with the company's longer-term interests. And it's a better strategy than Mr. Icahn's grab for cash.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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