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Icahn Backtracks on Apple Share Buyback

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Apple (AAPL - Free Report) management can breathe a sigh of relief after activist investor Carl Icahn dropped his aggressive share buyback proposal for the time being. The proposal that drew a flurry of attention over the last six months received a jolt over the weekend, when Institutional Shareholder Services Inc. (ISS) backed Apple’s strategy of holding cash.

Apple most recently disclosed that it has bought back shares worth $14.0 billion over the past two weeks, taking advantage of a declining share price. The company has spent more than $40.0 billion for share repurchase of its total $60.0 billion (to be completed by 2015) authorization in the past 12 months.

In his open letter to Apple shareholders following ISS’ recommendation, Carl Icahn also admitted that this aggressive buyback is one of the reasons behind his retreat. We believe he will now focus more on March-April when Apple is set to reconsider its buyback target.

Apple’s management has argued that the strong cash balance ($158.8 billion at the end of the first quarter) is necessary to maintain flexibility. Apple CEO Tim Cook noted that the cash will also facilitate the company’s long-term strategies that may include large acquisitions.

As most of Apple’s cash is parked in overseas markets, a large buyback may force the company to repatriate some of it by paying a hefty tax. The company can also borrow for the purpose, which may bring down its credit rating as per Moody’s’ (MCO - Free Report) investor service.

In such a scenario, support from an influential body such as ISS provided some room to Apple’s management against Carl Icahn. Additionally, consecutive share price rise signaled investors’ confidence in management’s current strategy despite a muted second-quarter outlook.

Apple continues to lose market share against Google’s Android operating system and handset maker, Samsung. Tim Cook also admitted that iPhone sales in North America were stalled in the first quarter, which is a major concern.  

Although the distribution partnership with China Mobile (CHL - Free Report) and partnerships with 50 new carriers are positive for overall sales, sluggish North American business will negatively impact gross margins. Moreover, lack of a new innovative product continues to remain an overhang on the stock.

Currently, Apple has a Zacks Rank #3 (Hold).

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