On Apple / What CEO Tim Cook Should Do


Mar 1, 2013

Written by Mary Buffett

If the Wall Street Journal and The Lifetime Channel ever wrote a mini-series together, it would be the story of Apple.

In a gathering that is part balance sheet and Woodstock, Apple shareholders will meet this week for their annual meeting. No shareholder meeting in recent memory has been this chock full of behind-the-scenes drama, intrigue and lawsuits than this year’s conclave. It’s clearly the most important week in Tim Cook’s stewardship.

From their founding, to their breakthrough products; from Steve Job’s rise, banishment, and eventual return; from its amazing resurgence until cancer consumed its co-founder, no company has ever built the narrative arc like Apple. I’m old enough to wonder why anybody would ever purchase a computer, but young enough to know I’d be lost without my iPhone.

In the short span of three decades, no other single company has been able to connect the dots between computing, the internet, music, telephony and reconceptualized it as Apple has done.

Before his promotion, Tim Cook knew that running a company like Apple would be different. Proctor and Gamble’s product line never engendered such intense brand loyalty. Customers of Pfizer never waited outside in midnight lines at a Rite Aid for the latest release of an ED medication.

So where do things stand now? Apple is the victim of its own good fortune. Their products are transformative, their balance sheet is solid, and they are sitting on a cash reserve that could run a medium sized European government for the next two years. It’s so enormous that if everybody who voted in the last election received an equal share of Apple’s surplus, a check of nearly $1,100 would await each voter.

Yet, this is more than a story of Apple’s stock price. When Steve Jobs passed away in October 2011, the Apple stock price soared and peaked just over 700 in September 2012 before sliding downward to this week’s price of roughly $450, a drop off of 40 percent. Perhaps this was the market’s way to eulogize its founder but what goes up eventually comes back down. 
Because of the stock swoon, Apple’s wings have melted and that remains a persistent headache for Tim Cook but stories of Apple’s perceived stumbles in the trade press are largely overblown. Let’s not forget that Steve Jobs certainly had his busts too; the failure of the Apple Lisa to succeed in the 1980’s was far more of a disaster than any of Apple’s current crop of headaches.

But blood is in the water and some are taking advantage of the situation. Lawsuits by billionaire hedge fund manager David Einhorn, which shed a spotlight on Apple’s surplus management, are all about stock performance and shareholder expectations, not product development. He simply wants to get paid.

A healthy cash reserve is fundamental for the long-term survival of any tech leader like Apple because customer expectations of technology can change over a weekend. The launch of the iPad rendered the pc netbook and the billions invested in it irrelevant and obsolete. The consolidation of every piece of the internet into the iPhone reduced every other cell phone to junk.

In quick succession, Apple could lose control of the technology they created and having a large cash reserve will allow them to quicken rebound. History is replete with companies like IBM, Yahoo, MySpace, and others because they discovered that lesson the hard way. At one point, they all appeared unbeatable but it was only a matter of time before the market passed them by. IBM’s computer unit was sold to Lenovo, Yahoo has been in continual turn-around for the past decade, and MySpace became a trivia question.

However, during mid 1990’s when Apple teetered on edge of extinction and was only weeks from running out of cash, Steve Jobs guided his company back to the center stage with the first in a series of innovative products. In spite of all of the successes since Jobs returned, Samsung and others are aiming squarely for the hearts and minds of Apple’s loyal customers.

It’s Tim Cook’s company now, but the ghost of his Steve Jobs still hangs over the brand — and his head. If any hedge fund manager had gone after Apple’s surplus like Einhorn is doing today, Steve Jobs would have dismissed him with a flick of a wrist and Einhorn would have been sent to the woodshed by the investment community.

Tim Cook can borrow a slice of the boldness from Apple’s history and turn events to his advantage. By doing so, it will shut up the critics, energize the faithful, but most importantly refocus the chattering classes from the stock price back to the product suite — where it belongs
Here is what Tim Cook should do:

Let’s address the easy choices first.
• Maintain the current dividend rate but signal that you are open to a marginally higher rate down the road. Remind the investment community that Apple dividends are about a rare as a solar eclipse.
• Position Apple to increase a sustained three-year stock repurchase program from $10 billion to $40 billion.

Now let’s go for the bold move. 
• Announce a 10:1 stock split.

A dramatic 10:1 split, combined with an increased stock repurchase, would return the kind of boldness Apple has needed since Job’s left the stage.

I know the arguments against stock splits and can recite them backwards and forward. I also know that most splits tend to run in the 2:1 or 3:1 territory, not 10:1. However pegging a share price at 45 verses 450 is psychologically healthy for the mid-to-long term.

While Berkshire Class A has never split, Berkshire’s Series B stock split 50:1 in 2010 because the belief was that a reduced stock price made the opportunity more accessible to investors. The stock has done well over the year and remains a good investment today.

Every CEO will argue against a stock split initially because they worry about diluted shareholder value and the potential oversupply of available shares in the marketplace. When added together, this means that the stock price will drag, regardless of the nuts and bolts of the organization. In some cases, they are right. However, most CEOs know that a stratospheric rise in a stock price foreshadows and inevitably returns to earth. In the end, these CEOs will look into the mirror and opt for a split.

Apple should do this too.

Apple remains one of the most innovative companies on the planet. They are also rumored to have a portfolio of exciting products in development, like the rumored iWatch, which is being prepped for release with well-placed rumors that creates buzz in the trades and other tech blogs. In Apple’s case, the products always drove the stock price, not vice-versa.

By taking this type of dramatic step, Tim Cook can consolidate his position not only as Apple’s CEO, but as its Main Thought Leader. By doing this, he can assert as the next author of Apple’s narrative arc, something more than an inheritor of Steve Job’s vision and execution.

If the torch of Apple can be truly passed, Tim Cook has to lead in a style exhibited by his predecessor, perhaps not with the brusque personal style of Jobs but with a surety of purpose. He has to insist that transformative products — not a stock price — are Apple’s true North Star. If he can do that, it will render the current sideshow moot but if he cannot accomplish that, Apple may begin a long sunset.

However, I believe that Tim Cook is more than up to the task.

Today’s question: Tell me what company you are rooting for and why? Email me here.

Author’s disclosure: Mary Buffett has purchased, held and sold Apple stock in the past.

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