Jana's Jab at Apple Seen as Strategy to Reverse Shrinking Assets

(Bloomberg) -- Barry Rosenstein’s push to protect children from overusing iPhones isn’t just about altruism.

The managing partner of Jana Partners offered a simple explanation for teaming up with the California State Teachers’ Retirement System this month to urge Apple Inc. to study whether young customers are being hurt.

“I don’t think there’s any conflict with generating a positive return” and corporate good, he told CNBC.

Jana’s move into socially responsible investing, whatever its motives, could help it secure new capital as its assets have dwindled. While Jana’s Apple stake of about $100 million doesn’t even rank it among the company’s biggest 300 investors, building a working relationship with directors to combat digital addiction may allow Rosenstein to leverage that access when the world’s most valuable company juggles plans for executive succession, the next breakthrough product or the use of $252 billion in overseas cash.

“There’s no reason to doubt Jana’s sincerity in raising this issue, but it doesn’t mean they don’t also have other motives,” said Joseph Fuller, a professor of management at Harvard Business School. Children’s phone use “is a ‘Have you stopped beating your wife?’ type of issue. The board of Apple has no choice but to make some sort of response.”

Trian, Blue Harbour

Jana’s Jan. 6 letter followed initiatives by activist investors Trian Fund Management LP and Blue Harbour Group LP to focus on social and environmental benefits as well as financial performance at portfolio companies. This week another activist fund, ValueAct Capital Management, made its first environment-focused investment at AES Corp. as the company transitions to cleaner energy. ValueAct founder Jeff Ubben will join the AES board to help guide the switch.

The notion that minding issues like greenhouse gas emissions and worker safety helps limit risk and boost long-term returns can appeal to investors such as public pension funds.

Jana’s letter to Apple’s board coincides with growing anxiety about technology companies’ social footprint and the side effects of their products. It generated a flood of supportive emails and calls to Jana and Calstrs from parents and teachers decrying the effects of excessive phone use on young Americans’ well-being.

The attention may help Jana attract new capital from sources that historically have shunned activist investors and their often bare-knuckle campaigns aimed at raising the value of stakes in their targets. New York-based Jana declined to comment on the effort.

Capital Exit

The exodus of money from hedge funds, particularly poorer performers, has cut into Jana’s arsenal. As of December, it managed $4.6 billion firmwide, down from $11 billion in August 2015. U.S.-domiciled funds focused on responsible investing, meanwhile, have attracted more than $6 trillion over the past decade, according to the Washington-based advocacy group US SIF.

In its Jan. 6 letter, Jana announced that it’s raising a new fund focused on fostering social change in addition to delivering returns. Elevation Partners, the firm co-founded by singer Bono, and TPG’s Rise Fund, whose founder’s board also includes the U2 frontman, operate on a similar premise.

Jana believes it can succeed based on its long history in shareholder activism, said a person familiar with the strategy. Calstrs, with its track record of cultivating corporate reforms and an Apple stake of about $1.9 billion -- its largest U.S. equity investment -- adds heft to Jana’s effort. Their combined holdings represent less than 0.3 percent of the company’s stock, though.

While Jana doesn’t plan to use stakes taken by its social impact fund to gain board representation, its intention if it did would be to advance social change rather than the more typical activist fund goals of spinning off a unit or replacing management, said the person, who asked not to be identified because the matter is private.

Parental Controls

Apple, responding to Jana in an emailed statement, said it plans new features to help parents control how children use its smartphones. The company didn’t specify how, or if, it will keep up a dialog with the activist going forward.

A representative for the Cupertino, California-based company declined to comment beyond its initial response.

Zeroing in on children’s phone use establishes Jana’s “bona fides as a long-term investor” and will help it get in front of directors, said Ken Bertsch, executive director of the Council of Institutional Investors. “It’ll be much harder for management to get in the way of Jana building a relationship with the board,” he said.

Jana may be able to parlay that access to influence Apple as it wrestles with strategic questions.

Investors have for years questioned Apple’s reliance on iPhones and its ability to replicate that success with new blockbuster product categories as global smartphone sales slow. Apple’s spending on research and development has doubled since 2013 and Chief Executive Officer Tim Cook has repeatedly expressed optimism about augmented reality and prospects for digital health care offerings tied to the Apple Watch. The company is also working on self-driving technology for cars.

Tax Cut

Spurred by December’s Republican tax overhaul lowering the rate for repatriating overseas cash, Apple said Wednesday it will bring back billions of dollars to the U.S. with plans to spend $30 billion on capital expenditures over five years and to create 20,000 new jobs.

Cook has left open the possibility of using repatriated funds for acquisitions. Academic studies show that more than 90 percent of the profit from corporate America’s last repatriation holiday in 2004 was used for buybacks, dividends and executive compensation.

Cook, 57, now in his seventh year as CEO, has a long-term stock award that will be fully vested by 2021. He told BuzzFeed last year that he’s grooming as many people as he can for the top job, and that the board will make the final decision.

--With assistance from Alex Barinka and Suzy Waite

To contact the reporters on this story: Anders Melin in New York at amelin3@bloomberg.net, Scott Deveau in New York at sdeveau2@bloomberg.net, Alex Webb in San Francisco at awebb25@bloomberg.net.

To contact the editors responsible for this story: Alicia Ritcey at aritcey@bloomberg.net, Elizabeth Fournier at efournier5@bloomberg.net, Michael Hytha, Peter Eichenbaum

©2018 Bloomberg L.P.