Class 3 Notes - Kevin Kaiser, Fall 2021 PDF

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Kevin Kaiser, Fall 2021...

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Classes 3 and 4 Proxy Process Shareholder and Board Rights Apple, Ichan, and Buybacks ●

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Starboard Value process to evaluate if a company is a good target ○ Undervalued on an absolute basis? ■ The absolute value of a business is determined by its cash flows and discount rate (riskiness) ■ This is what a passive investor cares about ○ Is there a plan to unlock value? ■ What’s going to change? If yes, how much value will it unlock? Is this amount worth the effort? ■ This is what differentiates an active investor from a passive investor ■ (i) is it going to change the way the market prices the company? Or (ii) will it change the actual value of the company? ○ Is there a clear pathway to influence the board? ■ Need all 3 criteria to be met to make a company a good target Is Apple a good target? **The market doesn’t have expectations** ○ The market is just a place where buyers and sellers meet ○ Supply and demand is what determines the price ○ You can’t guess what the market’s price reaction will be ■ i.e. if you get rid of the 1.03% return on marketable securities, you can’t predict what will happen to Apple’s stock ■ Instead, look at how Apple’s value changes if it buys back stock ○ Value (the blue line) has nothing to do with changes in the price in the market (the red line) Does Ichan’s proposal make sense/unlock value? ○ Yes, through the tax shield ○ Takes money paid to the government and pays shareholders ○ Adding leverage → less taxes → more money for shareholders (management’s fiduciary duty) ○ More so value transfer rather than value creation Apple can’t find a place to spend $150bn to create value ○ If you are generating more cash then you have ideas to put cash into → stop investing, otherwise you are value-destroying ○ How do you know there are no good investment opportunities? Having excess cash → evidence that management doesn’t have good projects to invest in ○ ROIC vs RONIC ■ N = new invested capital ■ ROIC has nothing to do with RONIC ■ High ROIC shows you’re generating good returns on existing investments ■ RONIC is forward-looking

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Apple wants to be careful about how many buybacks to do ○ Don’t want to piss off regulators by paying fewer taxes (argument against Ichan) ○ Putting on leverage to minimize taxes when apple is already making extremely high ROIC → apple is treading carefully...