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Dell LBO Looms Large Over Icahn's Apple Activism

Tickers in this article: AAPL DELL

Updated from 7:00 a.m. ET to reflect opening Apple share price

NEW YORK ( TheStreet) -- It's hard not to see Carl Icahn's two recent activist plays as closely related.

In August, Icahn took to Twitter to make the case for an expanded share buyback at Apple just weeks after he had hit a wall in pressing for a leveraged recapitalization of struggling PC-maker Dell to trump the firm's eventual $24.9 billion leveraged buyout.

Comparing Icahn's advice to Apple CEO Tim Cook with his complaints against Michael Dell, who now will own a majority interest in Dell, contextualizes issues that loom large over cash rich firms across Corporate America such as Microsoft, IBM, Hewlett-Packard, Wal-Mart and Pfizer.

How aggressively should mature corporations facing the uncertainty of new competitive threats pursue share buybacks or other returns of capital to investors?

In the case of Dell, five year's worth of share buybacks far above the firm's eventual takeover price proved to be a huge waste of money for investors. At the same time, Dell's over $13 billion in idle cash helped Michael Dell and private equity Silver Lake Partners finance the biggest leveraged buyout since 2007, in what Icahn deemed a "great giveaway."

Icahn proposed that Dell instead pay a special dividend with its unused cash and focus on growing the cloud software and IT assets the company had bought in a multi-year acquisition binge. It was certainly a risky strategy that included billions of dollars in financing with strings-attached. Ultimately, Icahn lost for a variety of factors, some unrelated to the merit of activist proposals.

Now after concluding his battle for Dell with a profit, Icahn believes Apple should significantly up its share buyback program, even after the iPhone maker instituted a $100 billion program to return of cash to investors by the end of 2015 , some of it funded through a $17 billion debt offering that was the largest in U.S. corporate history at the time.

According to Icahn, Apple shares are significantly undervalued given their price-to-earnings (PE) multiple of about eight times the company's consensus forward earnings estimate. That multiple is significantly below the overall PE ratio of the S&P 500, according to Bloomberg data. If the company can buy its shares at a deep discount to the prevailing market multiple, Icahn believes investors will be enriched over the long run.

But Icahn's recommendation for Apple faces the same risks that he pointed out at Dell.

Michael Dell ramped up Dell's share buyback in the wake of the Great Recession, only to see a swiftly declining PC-market pressure the firm's earnings and push its share price below $10. In retrospect, Dell's buyback plan was a disaster. And yet, Dell's offshore cash stockpile made it an easier target for LBO buyers at the start of 2013. What a quagmire.