1 + 1 = 3

Recently David Einhorn, the Greenlight Capital hedge fund manager, has suggested that Apple should issue preferred stock as a way of reducing the company's cash balance and increasing shareholder value. Einhorn argues that by giving the preferred stock to current shareholders, the market price of the preferred plus the new reduced price of the common stock (there would be a price drop since cash available to common shares would decrease) would be greater than the current stock price. In essence, Einhorn is arguing against M&M's pie model of the corporation. While we believe that excess cash does not create shareholder value, the idea that market participants can be fooled by adding preferred stock to a company's capital structure seems doubtful.