Buffet's Move on Heinz Validates Einhorn

David Einhorn of Greenlight Capital is battling with Apple over methods of maximizing shareholder value. Einhorn argues that "Cash Distributors Can BE Great Growth Businesses For Decades." Examples of this are Coca Cola and IBM. Tim Cook of Apple calls the issue a "silly sideshow." Well, I'm an Apple shareholder, and I don't think so. I think the strongest support of Einhorn's idea to issue preferred stock is the Heinz acquisition recently structured by Warren Buffett at Berkshire Hathaway. In order to purchase Heinz, Buffett knew he'd have to pay a premium to market, but he didn't want to overpay. So a key element of his deal was a large preferred issue, which Berkshire will own. The $8 billion preferred yields 9%. There's a tax arbitrage here as corporations only pay a 5% tax rate on preferred dividends rather than a 35% tax rate on interest. In the case of Apple, a preferred issue would be very valuable to corporate investors. In the case of Heinz, Buffett is buying a company with great brands that don't require a lot of financial capital to grow. So the preferred is a way of taking returns out of the company so the owner (Berkshire) can redeploy those assets productively. Einhorn points out that Apple is allowing a third of its market cap to sit on the balance sheet earning sub-par returns, giving no opportunity for shareholders to redeploy those assets. Apple is similar to Heinz in that its branding has created a business that generates excess capital. In order to maximize the value of Apple, the company must allow shareholders to redeploy the profits of the business. Let's hope the management looks at the Heinz deal and realizes they can create a similar structure for Apple shareholders.