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Icahnography: Strategies of Icahn, Meaning for Yahoo

icahnographyLooks like the story to watch is quickly becoming the story of the day.  Early rumors of Carl Icahn buying shares of Yahoo stock and gearing up for a proxy fight are now being supported by widespread reports that cite “sources familiar” or “involved in the matter.”  From Reuters to the WSJ, and all across the blogosphere of financial news, the news rooms and pundits are buzzing.

The reports for now provide the following set of facts (or suspected facts):

•Icahn is preparing to nominate a slate of 10, possibly 12, directors by Thursday’s deadline.
•One of the nominees is expected to be former Viacom CEO (1987 to 1996), and past Icahn compatriot, Frank Biondi.
•Icahn is proceeding with his strategy without any assurances from Microsoft that they’ll revisit merger discussions in a friendly deal if an Icahn controlled board initiates it.
•DF King has been retained to work on proxy solicitation, or prepare accordingly, should a proxy fight begin.
•Icahn is holding more than $1b of Yahoo stock.  Rough estimates are that he has at least 50million shares.

Views can be deceptive. At first glance, the shareholdings and press leaks (which may be as engineered as the share purchases) have all the makings of a straightforward corporate raid.  Icahn buys shares, rallies support among institutional investors privately, builds buzz in the press to add additional support, then uses the consortium to replace the board and sell out.  With a buy in around $25 a share (or as low as $23) and a sellout above $30, it represents a quick (and relatively easy) return of more than twenty percent on investment.   It’s simple, it’s obvious, it’s opportunistic and it fits the playbook Icahn has used in some past investments (BEA v Oracle in 2007, for one). 

The thing is, Icahn isn’t always a simple investor.  While the limited current facts fit the simple theory, they also fit the patterns of other more complex investment strategies used in his past maneuvers. Buying Yahoo shares could, and likely is, an investment with multiple exit strategies. 

A billionaire investor right out of Forbes top 50 richest people, Icahn is usually typecast for roles suited to his early accolades: the corporate raider of the 1980s.  According to lore, Gordon Gecko, the fictional archetype of the raiding-generation, was even supposedly modeled half after Carl Icahn.  (The other half was after arbitrage investor Ivan Boesky).

Before Icahn’s reputation was cast, he was a med school dropout who went to Wall Street in 1961.  Finding success, In 1968, he opened Icahn & Partners.  In these early years, the approach was innocent enough; an option and arbitrage investor.

In 1978 strategies shifted.  Instead of trading, Icahn branched out from options to control-driven positions that sought to use stock positions to influence management.  It was a move that coincided with the changing climate of the time.  It also defined Icahn as a pioneer in the “greenmail” days of the 80s.

Together with peers using similar strategies, Icahn and crew would buy shares in struggling companies and threaten them with the prospect of a hostile takeover.  The companies had two options: buy back the shares at a premium, or risk a full on takeover that could, if successful, banish management and break up and sell off assets like a chop shop getting rich off the parts of a stolen car.  

With moves against companies like RJR Nabisco and BF Goodrich, Icahn made a fortune.  He leveraged the strategies and tools of the day, junk bonds and greenmail, to his advantage.

Eventually, greenmail and junk bonds fell under regulatory scrutiny and lost their favor.  Markets evolved.  Icahn, even now at 72, has adapted and moved with them.

In today’s investment climate, the age of Sarbane Oxley and a post-Enron world, things are different.  For starters, shareholders, institutional and personal, are more informed.  News travels faster and further. Paranoia also chases potential scandal.   Rocks are constantly being turned over.  Investors are more actively seeking problems. 

In how investors act, the rules have changed too.  One major example is how mutual funds and institutional investors have become bolder.   Today, they’ve developed a pattern of taking decisive stands.  Instead of selling out of troubled companies, instead of letting private equity firms come along and privatize a company only to reap the rewards of basic managerial cleanups, institutional shareholders are bonding together to force changes themselves.   Whether it’s “say on pay” provisions to bring transparency, or battles to oust management, they’re not being shy about throwing their weight around.

Icahn has evolved with the times and become a soldier in this activist shareholder movement.  Using his own money, and that of institutional investors backing him, he’s rebranded himself as a white knight investor out to save shareholders from ineffective or entrenched management. 

Today, he’ll look for companies with troubles and begin to buy influence.  The positions which might range from 3 to 15 percent become leverage for him to push management to implement strategies of his suggestion: buybacks, asset divestitures, asset purchases, management reorganizations, or the replacement of boards.    It is not unlike the way a private equity firm operates, it just happens without the preliminary privatization.

Instead of buying a company outright, Icahn instead uses the leverage of a minority position mixed with support from a consortium of likeminded fellow investors.  Some of these players were shareholders before Icahn got involved.  Other’s came on Carl’s coattails.   (When Carl moves, you can count on hedge funds like  Firebrand, Third Point (PDF Profile Here), Highfields Capital and Tudor to consider following his lead).

Icahn’s office is 47 floors up in Manhattan’s GE Building. The posh suite looks across central park and screams out of both luxury and power.   Like a movie scene, it even hosts a metaphorical painting of Napoleon after a victory.

From the high ground of the office, Icahn oversees as mall army and empire. 

Icahn Partners, a hedge fund formed in 2004, manages more than 7 to 8 billion dollars (by most estimates).  As much as twenty percent of that money is out of Icahn’s personal fortune.  Supporting and managing all this is an in-house legal team and a staff of as many as thirty professionals.

In the past few years, the collective Team Icahn has been busy:
In 2004, they took a stake in Mylan Labs after the company announced the intent to buy King Pharmaceutical.   Icahn threatened a proxy fight and was able, on the strength of the threat alone, to kill the pending deal.

In August 2006, Icahn took a stake in then troubled Take Two Interactive.  Today, with new management, the company is in the midst of a turn around, and in the crosshairs of a hostile takeover from rival Electronic Arts.

In January 2007,  Motorola fell into Icahn’s favor.  His initial play was to use a small (relatively speaking) position to threaten a proxy fight over board representation.  His goal, according to later reports, was to pressure the company into buying back shares.  When the company’s market stature proved direr than realized but instead of bailing, Icahn held on.  This past, March (2008), more than a year later, he amped up the pressure again. This time, he filed lawsuits and used the  press  to try and reseat the board.   The eventual settlement got Icahn board representation and helped push Motorola to divest its mobile phone business to a separate company.

In September, it was BEA systems.  Over a month Icahn bought up more than 10% of the company and eventually used that stake to help pressure to the company to revisit acquisition talks with Oracle.

Beyond these, Icahn is also involved with Blockbuster and pushing their rebirth into retail, even a supporter of their proposed Circuit City acquisition.

With Motorola, Icahn evolved his strategy from mild leverage to aggressive.  He used the courts and the press, any tool he could, to increase the pressure.    With Blockbuster, despite the company’s struggles, he’s been a steady and supportive shareholder.  With BEA, he used his clout to bring a dead deal back to life.

Which style of Icahn is going to reveal itself in his Yahoo initiative?  Will it be one in particular, or is it a series of options and “if-then” statements?  

Icahn has said before “when most investors, including the pros, all agree on something, they’re usually wrong.”  That implied penchant for going against the grain makes second guessing his approach a unique challenge. 

There is definitely a story in what Icahn is up to.  Unfortunately, some chapters are missing.  Maybe he’s using the press to advance a cause (like Microsoft’s ultimatum hoped to do with Yahoo); maybe rumor and innuendo are just another tool.  Maybe this is the simple scenario.  Maybe the complex.  So far, it’s still developing.

As Gordon Gecko said in Wall Street “Money never sleeps.”  Funny thing, Carl Icahn is a night-owl too.


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