Carl C. Icahn, activist investor

Carl C. Icahn, activist investor

For nearly four decades, Carl C. Icahn has been participating in both large and small companies, in the process also becoming one of the richest men in the United States, with a net worth estimated by Forbes at $14 billion as of March 2012.

From cabana boy to corporate raider

Born in 1936, Carl C. Icahn grew up in the middle of the Great Depression in Far Rockaway, a neighbourhood in Queens, New York. He started his first ‘business’ at the age of 13, taking photographs of neighbours’ homes. developing the pictures in his basement, he then proceeded to glue them to the covers of matchboxes bought for 50 cents a box, and to sell the boxes to homeowners for $1.50 a pop.

After turning 15, he worked as a cabana boy at a beach club, piling up stocks of extra ice on particularly hot mornings only to sell it to customers who would run out later in the day. The entrepreneurship spirit and ensuing winnings at the poker table later helped him cover half of his tuition at Princeton. Graduating with a degree in philosophy and briefly serving as a medic in the Army, he then found himself among the sharks on Wall Street.

Mr. Icahn started pursuing his career on Wall Street in 1961, and just 7 years later, in 1968, he formed his own brokerage firm Icahn & Co, which focused on risk arbitrage and options trading (an option, in the investment vernacular, is a type of contract which gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date). By the late 1970s, Mr. Icahn was already engaged in his first proxy fights.

A proxy fight, or proxy battle, is a situation occuring mainly in the context of company takeovers. The acquiring party will persuade existing shareholders to vote out company management in order to join forces and gather enough shareholder proxies to win a corporate vote, so that the company will be easier to takeover. Source: Investopedia

He began taking significant and at times controlling positions in important US companies like TWA, Phillips Petroleum, Western Union and Revlon. It was the beginning of his activity as a corporate raider.

Corporate raid stands for purchasing a large interest in a corporation and subsequently exercising voting rights to enact measures targeted at increasing the company’s share values. Such measures may include downsizing operations, replacing top executives, or even liquidating the company for short term gains.

Some business feats

Mr. Icahn’s relentless activity contributed to coining the term ‘Icahn Lift’, which refers to the rise in a company’s stock price that occurs when Carl Icahn starts purchasing shares in a company. The Icahn Lift takes places because of the investor’s reputation for creating value for the shareholders of the companies in which he takes interest. Generally, Mr. Icahn purchases companies that he considers as being poorly run and traded below value, coming up with a plan to solve the problems, which, as previously pointed out, may include corporate raid measures such as changing company’s management, cutting costs and others.

This is precisely the reason Mr. Icahn has mostly been successful when a market is in a recession. It allows him to secure a large ownership position in a company, ofter demanding to get rid of the CEO (Mr. Icahn is notorious for particularly disliking top executives, claiming they embody the “anti-Darwinian metaphor. The survival of the unfittest.”)or even splitting the company into many different parts. This is what he did in 1980s: he bought controlling interests in undervalued companies, obtaining funding from Wall Street investment banks, and sold off the individual parts of those businesses separately to other enterprises.

Some of the recent battles Mr. Icahn has waged include:

  • In 2006, the investor was involved in a serious dispute with Time Warner Inc., a global leader in media and entertainment. Owning about 3.3% of the company’s stock, he was trying to influence management, constantly clashing with its well respected former chairman, Richard Parsons. After long talks, they managed to strike a deal: adding two independent directors to the company’s board and reducing costs.
  • In 2008-2009 he forced his way onto the board of Yahoo, after agreeing to drop his proxy battle to get rid of the company’s existing board in the figure of Jerry Yang. Previously he had been fighting for the company’s takeover and its purchase by the giant Microsoft. He spent 15 months on the board, stepping down in autumn 2009.
  • Then there is a long-running saga with Motorola: since buying millions of Motorola shares in 2007, Incahne was waging his usual proxy fight with several demands, such as dumping the CEO and breaking up the company. In 2011 the entreprise officially split into two companies, Motorola Solutions and Motorola Mobility (focused on consumer handsets). Mr. Icahn also contributing to striking yet another deal: Google agreed to purchase Motorola Mobility.

Shareholder activism

As a leading shareholder activist, Mr. Icahn believes his efforts have unlocked billions of dollars of shareholder and bondholder value and have improved the general level of competitiveness of American companies. This is how Mr. Icahn describes his investment approach: “My investment philosophy, generally, with exceptions, is to buy something when no one wants it.” A recent study titled Is Carl Icahn good for Long-Term Shareholders provides some interesting data: companies purchased by Mr. Icahn do profit from the operation in terms of stock gains: the average stock gains are 25 percent, whereas shares in the independent businesses tend to fall about 60 percent in the 18-month period after his ownership is revealed. As for the shareholders, they seem to receive a short-term benefit from his operations, but normally get a long-term profit only if the company is acquired.

Mr. Icahn’s activism also shows in philantropy: Icahn’s fund has been building a science center at the Choate Rosemary Hall school in Connecticut, US, as well as charter schools in the Bronx, NY, US. It has also made considerable donations to Mt. Sinai Hospital and the Randall’s Island Sports Foundation for the construction of Icahn Stadium, a new track and field stadium.

The Children’s Rescue Fund, which was established by Mr. Icahn, created an Icahn House for homeless families in The Bronx, New York, and operates homeless shelters located in New York City.

Still not sure what to make of Mr. Icahn’s story? Perhaps one of his quotes, which he seems to be using as his own motto, could shed some light: “In life and business, there are two cardinal sins, [...] The first is to act precipitously without thought, and the second is to not act at all.”

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