Alim Mitha (20567215)

Apple: Corporate Governance and Stock Buyback Case Synopsis

Background and Key Issues
This case involves the public company Apple Inc., and key decisions regarding an aggressive stock
buyback in order to drive its stock price up. This stock repurchase proposal has been introduced by Carl
Icahn, an investor who has a considerable sum of Apple Inc.s shares. Apple Inc. is a business which was
incorporated in California in January 1977 that focuses on areas such as mobile communication, media
devices, personal computers, as well as software for these devices. Apple has proven to be very
successful in all of these areas despite the market for these products being extremely competitive.
This success is characterized by its seamless integration between hardware and software, innovative
products, a clear and simple marketing plan, and high margin structure. Research and development was
another area that contributed to their success; with a total of $6.0 billion spent over the past 3 years.
The decision regarding the stock buyback program is to be discussed during the annual meeting, in
addition to many other issues regarding corporate governance. Some of these other issues included the
election of the board of directors, appointment of accounting firms, and the approval of an executive
compensation system. These topics are relatively agreed upon the issue of the buyback is what is to be
discussed and debated heavily.

Alternatives
The decision regarding the stock buyback is dependent on the shareholders. These shareholders couls
decide to go through with this aggressive stock buyback program, in order to decrease the shares
outstanding and in return increase the value of the remaining shares in the market. This would be done
through the issue of tens of millions of dollars of bonds. This is because Apple Inc.s cash is locked
overseas as a tax-saving effort.
On the other hand, the shareholders can decide not to go through with the share repurchase program to
the extent of Icahns and stay with the original course of doubling the program by 2015 instead of
jumpstarting it right now. This can allow Apple to use that money towards other priorities such as
mergers and acquisitions, research and development, and other actions that support innovation instead
of financial engineering.

Analysis
When a stock repurchase program is announced, the value of the firm increases due to a number of
factors. The greatest impact is on the earnings per share value this is because the number of shares
are decreasing, but the free cash flows would stay the same. This can encourage many shareholders
looking for this type of return to invest in the company. Shareholders would also receive a larger
dividend, due to the same reason of shares being significantly lower but the value of dividends staying
the same. However, a share repurchase is usually common with firms that are moving away from
growth. Apple Inc. is a constantly innovating and changing company, indicating that a share repurchase
program may not be in the best interests of its culture. The announcement of a share buyback program
may deter investors that are looking for revenue and profit increases, which seems to be the type of

Alim Mitha (20567215)

investors Apple Inc. is trying to attain. As mentioned earlier, a stock repurchase program also distracts
Apple from participating in mergers and acquisitions and research and development, which has proven
to be one of the main reasons for its continuing success.

Recommendation
Overall, I believe that a stock repurchase program does not align with the culture and long term goals of
Apple Inc. Though it may satisfy shareholders in the short term by increasing EPS and the value of
shares, it communicates an image that the company is moving away from innovation and growth one
that is not common in the technological sector.