Carl Ichan to Apple: I Know How To Get Your Stock to $1,000 a Share Billionaire investor Carl Icahn sent

a letter to Apple Inc. CEO Tim Cook pushing the company to implement a $150 billion stock buyback plan. Mr. Icahn says he boosted his stake in the iPhone and iPad maker to 4.7 million shares and said a bigger buyback could push the stock up to $1,250 in three years. In addition, Mr. Icahn said he intends to continue boosting his investment in Apple: There is nothing short term about my intentions here, Mr. Icahn says. For your learning pleasure, here is a copy of the letter in its entirety: October 24, 2013 Dear Tim: It was a pleasure meeting you for dinner at the end of September. When we met, my affiliates and I owned 3,875,063 shares of Apple. As of this morning, we owned 4,730,739 shares of Apple, an increase of 22% in position size, reflecting our belief the market continues to dramatically undervalue the company, even when taking into account the recent market appreciation, which in turn makes our proposal unchanged with respect to a $150 Billion buyback. We were pleased to hear at our dinner that you appreciated our input and that you would speak to us again in three weeks to continue the dialogue. In anticipation of doing so soon, we aim to reiterate in this letter the point of view already expressed to you directly with the hope of effectively summarizing it for the companys board of directors and our fellow shareholders. From our perspective, Apple is the worlds greatest consumer product innovator and has one of the strongest and most respected brand names in history. We consider Apple to be our most compelling investment. I first informed my followers on Twitter on August 13, 2013 of my large position. I also expressed to you my opinion that a larger buyback should be done now. At that time, we owned 3,448,663 shares and the stock price was $467. Since then we have purchased an incremental 1,282,076 shares (bringing the total value of my position to $2.5 Billion) and we currently intend to buy more.

We want to be very clear that we could not be more supportive of you, the existing management team, the culture at Apple and the innovative spirit it engenders. The criticism we have as shareholders has nothing to do with your management leadership or operational strategy. Our criticism relates to one thing only: the size and timeframe of Apples buyback program. It is obvious to us that it should be much bigger and immediate. When we met, you agreed with us that the shares are undervalued. In our view, irrational undervaluation as dramatic as this is often a short term anomaly. The timing for a larger buyback is still ripe, but the opportunity will not last forever. While the boards actions to date ($60 billion share repurchase over three years) may seem like a large buyback, it is simply not large enough given that Apple currently holds $147 billion of cash on its balance sheet, and that it will generate $51 billion of EBIT next year (Wall Street consensus forecast). The S&P 500 trades at roughly 14x forward earnings. After backing off net cash, Apple trades at just 9x (not factoring into account that the company has a significantly lower cash tax rate than the rate Wall Street analysts use). This discount (cash adjusted) becomes even more compelling given our confidence that Apple will grow earnings per share at a rate well in excess of the S&P 500 for the foreseeable future. With such an enormous valuation gap and such a massive amount of cash on the balance sheet, we find it difficult to imagine why the board would not move more aggressively to buy back stock by immediately announcing a $150 Billion tender offer (financed with debt or a mix of debt and cash on the balance sheet). While this would certainly be unprecedented because of its size, it is actually appropriate and manageable relative to the size and financial strength of your company. Apple generates more than enough cash flow to service this amount of debt and has $147 billion of cash in the bank. As we proposed at our dinner, if the company decided to borrow the full $150 billion at a 3% interest rate to commence a tender at $525 per share, the result would be an immediate 33% boost to earnings per share, translating into a 33% increase in the value of the shares, which significantly assumes no multiple expansion. Longer term (in three years) if you execute this buyback as proposed, we expect the share price to appreciate to $1,250, assuming the market rewards EBIT growth of 7.5% per year with a more normal market multiple of 11x EBIT. It is our belief that a companys board has a responsibility to recognize opportunities to increase shareholder value, which includes allocating capital to execute large and well-timed buybacks. Apples Board of Directors does not currently include an individual with a track record as an investment professional. In my opinion, any further delay in executing the buyback we hereby propose will reflect this lack of expertise on the board. My firms success and my expertise as an 2

investor would be difficult for anyone to argue. Per my investment thesis, commencing this buyback immediately would ultimately result in further stock appreciation of 140% for the shareholders who choose not to sell into the proposed tender offer. Furthermore, to invalidate any possible criticism that I would not stand by this thesis in terms of its long term benefit to shareholders, I hereby agree to withhold my shares from the proposed $150 Billion tender offer. There is nothing short term about my intentions here. Sincerely, Carl Icahn Chairman, Icahn Enterprises (IEP)

My Comments: Allow me to explain the math as to why Icahn thinks an Apple stock buy-back stock will increase its value. If I own a company that earns 1.00 per share, and it is worth $10 per share on the market, we can say that the company is valued at 10 times the earnings. In the future, if earnings rise to $1.50 per share and the stock continues to sell at 10X earnings, then the price of the stock would be worth $15. Now this is what Icahn is saying is to Apple: If you were to reduce the number of shares outstanding by 33%, then the companys earnings would increase by 33%, increasing the value of the stock by 33%. This is accomplished even though the company didnt have to sell one more iPad or iPhone to increase its earnings. This is called financial engineering. Now in the future, if Apple increases its earnings by 7.5% per year, not a huge hurdle, if you ask me, and people were willing to pay a little higher price relative to earnings. Then the stock could be worth $1,250 in three years. Its simple math (maybe too simple). Apple has to decide if it can use its cash more effectively by re-investing in new products. After all, their biggest competitor Google is a global powerhouse and is eroding Apples domination of the marketplace. Taking Carl Icahns advice might help stockholders today, but could do so at the expense of the future. Therefore, beware the simple-math and while Mr. Icahn has a good track record-- becoming a billionaire in the process, no one is right 100% of the time. Make sure you do your homework before investing your hard-earned money. Steve Pomeranz is a Managing Director for United Capital Financial Advisers, LLC, "United Capital", and owner of On The Money. On The Money is not affiliated with United Capital.