The Masters of Finance series continues with one of our more controversial members, Carl Icahn. The billionaire hedge fund manager has become a fixture on financial news shows, often talking up the companies he invests in. And when Icahn takes positions, he goes in big-buying up blocks of shares worth hundreds of millions (and sometimes billions) of dollars.
Icahn began his career on Wall Street as a stockbroker (the precursor financial advisors) in the 1960’s. By the 1980’s he had started Icahn & Associates, a broker dealer that specialized in options trading.1 It was later on that he created Icahn Enterprises which is a holding company for many of his positions. It acts like a conglomerate, not unlike Warren Buffett’s Berkshire Hathaway.
Icahn is an ‘activist’ investor, one who purchases large equity stakes in a company with the goal of making changes in the operations. Unlike individual investors who don’t make decisions for the company (outside of a token proxy vote), activists wield substantial power to affect change at the company. Their large stake affords them voting power (and the ability to gain seats on the boards of directors) which can influence everything from dividend policy, mergers and acquisitions decisions and management compensation. Activists protest against excessive compensation packages for CEO’s and often publicly chide them. Icahn has likened some CEOs as essentially being frat brothers with members of the board.2 Activists can also move to restructure a company, which usually means slashing costs.
But the most commonly stated goal of any activist is to increase shareholder value. While the equity shareholders may be winners in an activist deal, other stakeholders may feel the pain. Employees may face layoffs and the company could be left saddled with debt, hurting bondholders and hindering future prospects.
While activists may appear to be in the interests of the little guy, some disagree. Management usually doesn’t like activists coming in and telling them how to run their company, so there is often a contentious atmosphere between the two entities. Some even accuse activists as raiding the company for their own profit. In activist’s mind, excessive cash on the balance sheet is often perceived as wasting resources and is to be returned to shareholders in the form of special dividends or share buybacks, which help boost earnings per share and the stock price. Sometimes the long-term vision of a company is undermined by shorter-term intentions of activists. Some have even called for an activist or ‘corporate raider tax’.3
But target companies have some defenses against the hostile takeover attempts of activists. These have colorful names, including ‘poison pills’ and ‘white knights’. A poison pill is one type of shareholder rights plan that allows existing shareholders to purchase stock at a discount to the market price if any hostile entity obtains a large enough stake in the company (typically 20%). The objective is to dilute the value of existing equity to deter the hostile acquirer from embarking on the takeover attempt. Poison pills are a controversial move and have even become illegal in some markets, notably the United Kingdom. A notable example of a poison pill occurred when Yahoo! threatened to use a shareholder rights defense on hostile acquirer Microsoft. The controversial defense ‘worked’ and Microsoft never acquired the company. Not surprisingly, Carl Icahn had already been involved in a proxy battle with Yahoo!, which he dropped following this episode with Microsoft.4
A white knight defense occurs when a company that’s targeted by a hostile takeover (black knight) solicits a ‘friendlier’ company (the white knight) to make a bid for the target company instead of the hostile. But the black knight must be careful not to spark a bidding war with the white knight which could cause a bidding war that would cause either firm to grossly overpay for the target company. A notable example of a white knight defense occurred in 2006 when Bayer acted as a white knight to aid Schering Plough from a merger (essentially a takeover in this case) by Merck.5 In response, the black knight may choose to up their bid over the white knight to gain shareholder support for the takeover.
Along with his son Brett, Carl oversees Icahn Enterprises, a publicly traded holding company for many of Icahn’s positions. But the stock (Symbol: IEP) has had a rough 12 months, dropping almost 40% (not including dividends).6 Major holdings for IEP include online payment company PayPal, fallen angel Xerox Corporation and insurance giant AIG.
Icahn is trying to shake things up at AIG, with plans to increase share buybacks, and ultimately unlocking shareholder value by breaking up the formerly bailed out insurer into three separate companies. By threatening a proxy battle to gain board seats in an effort to facilitate policy change, AIG conceded some control to Icahn as well as another activist John Paulson. Sometimes it’s better to give some concessions rather than mount a lengthy defense which can divert resources away from the core operations of the company. AIG conceded and gave a board seat to Samuel Merksamer, a managing director at Icahn Capital. Cathy Siefert, S&P Capital IQ analyst agreed with AIG’s concession noting “Giving them the board seats as opposed to going through an extensive and aggressive proxy battle was a very smart move on the part of AIG.”7 Here are a few of Carl Icahn’s other notable deals:
One of Icahn’s most high-profile deals was his takeover of TWA airlines in the mid ’80s. Icahn has a history of targeting asset-heavy companies, which can be sold off to pay off the borrowed money for the takeover. The airline TWA certainly has plenty of assets and was a perfect Icahn takeover target. This process is known as asset-stripping. This term denotes a negative connotation and is a controversial policy. In 1988, Icahn walked away with roughly $459 million after he took the company private.8 While profitable for Icahn personally, the TWA deal left the company with $540 million in debt.9 This deal left an unfavorable opinion of Icahn for many, earning him a title of ‘corporate raider’, the negative version of activist.
In August of 2013, Carl Icahn revealed he had bought a substantial stake in Apple. The news of Icahn’s purchase helped fuel the stocks run, especially after Icahn publicly pegged Apple’s value at $216.37 per share. Even Icahn doesn’t have the resources to by a majority stake in Apple, worth over $700 billion in market capitalization at its peak in 2015, the largest company in the world by that metric.10 But public jawboning can still be an effective alternative. Icahn had dinner with Cook on a few occasions and has publicly released a wish list of sorts for Apple management to consider with the end goal of increasing shareholder value. One of these was to tap into Apples massive cash reserves and distribute the money to shareholders in dividends and through share repurchases. The stock never reached Icahn’s lofty target and in April of 2016 he sold his stake in the stock, citing concerns of a slowdown in China, a significant growth area for Apple. Icahn reportedly netted $2 billion in profit on his Apple trade.11
Icahn recently revealed a new stake last week in Botox manufacturer, Allergan Pharmaceuticals. The U.S. has an aging demographic with plenty of expendable cash, the makers of Botox certainly could have a bright future. Further, Icahn has had a relationship with existing Allergan management in the past whom he views as shareholder friendly. Icahn previously dealt with Allergan CEO Brett Saunders in a 2014 merger between Actavis and Forest Labs.12 As a result of that merger, which he helped orchestrate, Icahn reportedly realized a gain of roughly $1.7 billion as a major shareholder in Forest Labs.13
As you can see, activist investing can produce windfall profits for themselves and partners. While the attitude has certainly switched to favorable but there remains the possibility that a sour stock market could tarnish activist’s reputations once again. Until then, expect to see more activist investing as low interest rates raise the demand for income for shareholders, in one form or another. At age 80, Carl Icahn shows little sign of slowing down. And with his son Brett fully ensconced in the decision making process at Icahn Enterprises, the Icahn legacy should continue well into the future.