Carl Icahn – the Hyper Active ‘Vulture Capitalist’

carl-icahn1-hedgethink Carl Icahn - the Hyper Active 'Vulture Capitalist'
Back in the heady days of Wall Street in the 1980s, hedge fund manager Carl Icahn made a name for himself as a ruthless corporate raider, although these days, he prefers the term “activist investor”. His pro-active event-driven strategies have left more than a few bodies in their wake over the years, but there is no denying that he knows how to make money for the investors in his fund – and many of his efforts have in fact had positive repercussions.

Like John Paulson, who we profiled yesterday on Hedgethink, Carl Icahn was raised in Queens, New York, the son of two schoolteachers. He earned a degree in philosophy from Princeton University in 1957 before studying medicine at NYU, but he dropped out two years later and joined the army.

After a short stint in the armed forces, Icahn went to Wall Street to work as a stockbroker in 1961. He formed his own securities firm, Icahn & Co, in 1968, focusing on options trading and risk arbitrage. However, he changed tack in 1978 to start taking controlling positions in individual companies in order to influence their direction – and their share price. Over the years, he has taken major or controlling stakes in a number of companies that can be considered household names, including Texaco, Western Union, Viacom, Marvel Comics, Revlon, Blockbuster, Time Warner, and Motorola.

Icahn’s reputation as a ruthless corporate raider was cemented in 1985 with his hostile takeover of the airline TWA in 1985, the airline started by the legendary Howard Hughes. He then sold off TWA’s assets to repay the junk bond debt he incurred buying the company, a process known as a ‘leveraged buyout’ (LBO). This trade was undoubtedly the inspiration for Gordon Gekko’s asset-stripping of Blue Star Airlines in Oliver Stone’s Wall Street. In 1988, Icahn took TWA private, leaving the airline with a debt of $540 million and making a personal profit of $469 million. He made a further profit in 1991 when he sold TWA’s prize asset – its London routes – to American Airlines for $445 million.

He attempted the same trick with the mighty US Steel in late 1986, launching a $7 billion hostile takeover for the industrial giant, although the deal was successfully resisted in the end by US Steel CEO David Roderick.

While he made his name in the 1980s, many of his biggest deals came in the 2000s. One such deal was the purchase of a large holding in Mylan Laboratories after Mylan had announced a deal to buy King Pharmaceuticals. Believing that Mylan were overpaying for the King stock, Icahn threatened a proxy fight over the acquisition, which lead to the collapse of the proposed takeover.

He also had a crack at becoming a major shareholder of Time Warner, and at one stage owned 3.3% of the corporate giant. Icahn was looking to influence the future direction of the firm, which drew him into conflict with its then-CEO Richard Parsons. Despite selling off 5% of its AOL division, Icahn was looking for a much bigger restructuring in order to increase value for shareholders. In 2006, he led a group of investors with a 343-page proposal to break up the corporation into four four companies and stock buybacks totaling approximately $20 billion.

The following year, an agreement was reached between Icahn’s group and Time Warner not to contest the re-election of Time Warner’s slate of board members. In exchange for their co-operation, Time Warner agreed to a $20 billion stock buyback, cutting costs by $1 billion, the nomination of more independent members to the board, and continued discussions over the proposal, particularly with regard to spinning off Time Warner Cable.

One of his most high-profile activist positions in recent years was in ousting Jerry Yang as CEO of Yahoo, which allowed Microsoft to purchase the ailing web giant and leverage its search expertise for their new Bing search engine.

While he may not be engaging in the kind of ruthless asset-stripping that had been his trademark in the 1980s, board members at top corporations still live in fear of today’s Carl Icahn. These days, he doesn’t need to pile up on junk bond debt to buy into multi-billion dollar companies – he can now do it with his own money. In the last decade or so, he has turned his Icahn Enterprises LP into a giant, diversified holding company with around $24 billion under management.

Speaking to the Verge, veteran money manager Joshua Brown had this to say of Icahn: “As essentially the wealthiest individual hedge-fund manager of all time, he is in an extremely rare position,” explains Brown. “Nobody can tell him what to do or what not to do.”

However, these days he can wield a huge amount of influence without having to throw money into companies. As one of the most influential investors in the world, his Tweets are watched by virtually every stock trader, and a single tweet from Icahn sent Apple shares up by a staggering 5%.

In recent years he has focused almost solely on the tech sector, which is awash with cash-rich companies ripe for the picking by activist investors such as Icahn. Compared to the companies he ripped apart in the 1980s, his positions in these firms have been a lot less destructive, as they already tend to have few employees relative to their size and tend to be quite tax-savvy. In most cases, he has merely campaigned for shareholders to get better value from their investments in these firms by forcing them to get more cash off the balance sheet and into the pockets of shareholders.

That being said, he can still get the knives out on occasion, such as with his recent demand that eBay spin off PayPal. After building up a 1% stake in the web auction and online payment giant, he put pressure on the board to spin off eBay, arguing that the companies would be worth more separately than together. With PayPal eclipsing eBay in recent years, spinning it off would reap huge rewards for shareholders, although it would probably weaken eBay in the long term. He has since been forced to soften his stance, and is currently demanding that only 20% of Paypal be spun off, but the story is far from over.

While Icahn’s shareholder activism can be good news for short-term investors, it tends to be bad news for the company, its employees, and its long-term stakeholders. However, while he doesn’t win every fight he picks, he will often still make a profit. For example, the media coverage surrounding his failed takeover of Netflix pushed up the share price to the extent that Icahn made over $825 million from the rise in the share price. So, even when he loses, he often still comes out smiling.