فصل 6 بخش 1

CHAPTER 6.1

CARL ICAHN: MASTER OF THE UNIVERSE

The Most Feared Man on Wall Street

Question: When is a single tweet worth $17 billion?

Answer: When Carl Icahn says Apple is undervalued and announces he’s buying the stock.

Within an hour of Icahn’s tweet in the summer of 2013, Apple stock had jumped 19 points. The market got the message: whenever the billionaire businessman takes an interest in a company, it’s time to buy. Four months later, Time magazine put his face on the cover with the headline “Master of the Universe.” It went on to say that he’s “the most important investor in America.” That’s right. In the past four decades, Icahn’s ventures have earned 50% more than that other investment icon, Warren Buffett. A recent analysis by Kiplinger’s Personal Finance shows that while most people think of Buffett as providing the greatest returns through time, if you’d invested with Icahn in 1968, in 2013 you would have had a compounded return of 31% versus Berkshire Hathaway—Buffett’s company—with “only” a 20% return.

Icahn’s business skills have made him one of the richest men in the world—at last check of the Forbes list, he was 27th, with a net worth of more than $23 billion—and he’s made billions more for ordinary shareholders who invest in his diversified holding company, Icahn Enterprises LP (NASDAQ: IEP), or own stock in the companies he targets. The secret to his success? Even his critics will tell you Carl Icahn doesn’t just look for opportunities in business—he makes them.

But most outsiders still think of him as a Wall Street caricature, a ruthless vulture capitalist who pillages companies for personal gain. When you Google the term corporate raider, Icahn’s name autofills in the search bar.

But Carl Icahn is challenging that creaky old stereotype. Icahn thinks of himself as a “shareholder activist.” What does that mean? “We go in and shine a light on public companies that are not giving shareholders the value they deserve,” he told me. His obsession, he says, is to stop the abuse of stockholders by improving corporate governance and accountability—which makes American companies stronger and therefore the American economy stronger.

The New York Times describes him this way: “By rattling corporate boards, mounting takeover efforts and loudly jostling for change at companies, he has built a multibillion-dollar fortune, inspiring fear among chief executives and admiration among his fellow investors in the process.” Icahn buys up shares of top-heavy or underperforming companies and then puts them on notice that it’s time to step up their game—or face a proxy fight for control of the board.

He sees himself in a battle with those who use the coffers of public companies to enrich themselves at the expense of the shareholders. “Tony, people have no idea how they’re getting screwed,” he said, adding that average investors aren’t aware of the abuses that go on behind the closed doors of boardrooms. But part of the problem is that shareholders don’t believe they have the power to change things because they don’t think like owners. Icahn, however, knows the power of leverage—and he’s not afraid to use it.

$24 BILLION FOR COCA-COLA MANAGEMENT INCENTIVES?

An example of the kind of action that public company boards take that outrage Icahn can be found in his recent criticism of Coca-Cola. Coke was planning to dilute the company’s stock value by issuing $24 billion in new, discounted shares. The reason? To finance huge compensation packages for top management. This would weaken the retirement investments of ordinary investors, including teachers and firefighters, because so many people have Coke stock in their retirement portfolios.

Icahn wrote an editorial in Barron’s blasting the company for the scheme, and calling out Warren Buffett—Coca-Cola’s single largest shareholder and a board member—for not voting against the move. “Too many board members think of the board as a fraternity or club where you must not ruffle feathers,” Icahn wrote. “This attitude serves to entrench mediocre management.” Buffett responded that he had abstained from the vote but was opposed to the plan, and that he had been quietly talking to management about reducing its excessive pay proposal—but he didn’t want to “go to war” with Coke over the issue.

In contrast, Carl Icahn is always ready for war. He’s been in the trenches many times before, making runs on companies as diverse as US Steel, Clorox, eBay, Dell, and Yahoo. But this time was different: instead of Icahn, a younger fund manager named David Winters was buying stock and leading the charge against Coke’s management. To the dismay of overpaid CEOs everywhere, a new generation of “activist investors” is taking up the fight Icahn started decades ago.

Naturally, Carl Icahn has ticked off a lot of corporate dynamos, enemies with big clout in the media. So you’ll often hear his critics saying that he’s only in it for the money, or that he “pumps and dumps” stocks, sacrificing long-term corporate goals for short-term profits. But Icahn points out that this is ridiculous, in that he often holds his positions for much longer than people realize—sometimes 10, 15, even 30 years. And when he does take control of a company, its value continues to rise for years, even after he’s left. This claim has been borne out by a study conducted by Harvard Law School professor Lucian Bebchuk, who analyzed 2,000 activist campaigns from 1994 to 2007. It concluded that “operating performance improves following activist interventions.” The study also found that not only were there no detrimental long-term effects, but instead, five years later these firms continued to outperform.

Carl Icahn isn’t after the head of every CEO in America. He’s often acknowledged that there are some extraordinary leadership teams out there, and executives who maximize company resources and make the economy more resilient. But he’s always looking for ways to make the management—even of the most popular and well-run corporations—more responsive to shareholders.

Take that Apple tweet, for example. He told me he wasn’t trying to drive up the price and sell his stock. (In fact, on the day of our interview, he bought a large amount of Apple stock.) And he wasn’t trying to interfere with the company’s management—which he thinks is solid. The tweet was just part of a campaign to pressure Apple to return $150 billion of its cash reserves to its shareholders as dividends. The company eventually expanded its capital return program to over $130 billion in April 2014, including an increase in its share repurchase authorization to $90 billion from the previously announced $60 billion level. At the same time, Apple announced an increase to its quarterly dividend and a seven-for-one stock split. Today it is 50% higher than the day he did the tweet.

Icahn is a CEO himself, owning 88% of a public company, Icahn Enterprises. The company’s stock has done amazingly well, even during the so-called lost decade. If you’d invested in Icahn Enterprises from January 1, 2000, to July 31, 2014, you would have made a total return of 1,622%, compared with 73% on the S&P 500 index!

Carl Icahn wasn’t born into this life. He says he grew up “in the streets” of Far Rockaway, New York. His mother was a teacher; his father, a former law student and a frustrated opera singer who worked as a cantor at a local synagogue. Carl played poker to pay for his expenses at Princeton, where he majored in philosophy. After a brief attempt at medical school and a stint in the army (and more poker), he realized that his greatest talent was for making money. Corporate America has never been the same.

Icahn is now 78 years old and thinking about his legacy. He’s been busy writing op-ed pieces and giving select interviews about the rights of investors and shareholders. But, frankly, he’s sick of being misunderstood and quoted out of context. Which is why, not knowing who I was or my true intent, he asked that my video crew not film our interview and stated, “I’ll give you a few minutes.” To my great relief, Icahn warmed up after those first awkward moments, and two and a half hours later I was lingering with him in the hallway and being introduced to Gail, his extraordinary wife of 15 years. Carl is very different from his public persona. He’s funny and curious, even grandfatherly. His friends say he’s mellowed a bit. But he still talks with a Queens accent, and he still has the sharp edge of a New York street brawler. Icahn says he’s not the kind of guy who gives up. Especially when he’s found something worth fighting for.

TR:

You come from a family of modest means, and you went to public schools in a rough part of Queens. Did you have a goal when you started out, that you were going to become one of the best investors of all time?

CI:

I’m a very competitive guy. Passionate or obsessive, whatever you want to call it. And it’s my nature that whatever I do, I try to be the best. When I was applying to colleges, my teachers told me, “Don’t even bother with the Ivy League. They don’t take kids from this area.” I took the boards anyway and got into all of them. I chose Princeton. My father had offered to pay for everything, then he backed out and would only pay tuition, which—if you believe it—was $750 a year back then. I said, “So where do I sleep? How do I eat?” My parents said, “You’re so smart, you’ll figure it out.” TR:

So what did you do?

CI:

I got a job as a beach boy at a club in the Rockaways. I was a good beach boy! The cabana owners used to say, “Hey kid, join our poker game and lose your tips for the week.” At first I didn’t even know how to play, and they cleaned me out. So I read three books on poker in two weeks, and after that I was ten times better than any of them. To me it was a big game, big stakes. Every summer I won about $2,000, which was like $50,000 back in the ’50s.

TR:

How did you get started in business?

CI:

After college I joined the army, where I kept playing poker. I came out with maybe $20,000 saved up and I started investing it on Wall Street in 1961. I was living good, had this gorgeous model girlfriend and I bought a white Galaxie convertible. Then the market crashed in 1962, and I lost everything. I don’t know what went first, the girlfriend or the car!

TR:

I read that you got back in the market, selling options, then going into arbitrage.

CI:

I borrowed money to buy a seat on the New York Stock Exchange. I was a hotshot guy. My experience taught me that trading the market is dangerous, and it was far better to use my mathematical ability to become an expert in certain areas. Banks would loan me 90% of the money I needed for arbitrage, because back then, in riskless arbitrage, if you were good, you literally couldn’t lose. And I was starting to make big money, $1.5 to $2 million a year.

TR:

I’d love to talk to you about asymmetric returns. Were you also looking for those when you began taking over undervalued companies?

CI:

I started looking at these companies and really analyzing them. I tell you, it’s sort of like arbitrage, but nobody appreciates that. When you buy a company, what you’re really buying are its assets. So you’ve got to look at those assets and ask yourself, “Why aren’t they doing as well as they should be?” Fully 90% of the time, the reason is management. So we would find companies that weren’t well run, and I had enough money that I could come in and say: “I’m taking you over unless you change, or unless the board does X, Y, or Z.” A lot of times the board said, “Okay.” But sometimes the management would fight us and perhaps go to court. Very few people had the tenacity I had—or were willing to risk the money. If you looked at it, it appeared that we were risking a lot of money, but we weren’t.

TR:

But you didn’t see it as risky because you knew the asset’s real value?

CI:

You look for risk/reward in the world, right? Everything is risk and reward. But you’ve got to understand what the risk is, and also understand what the reward is. Most people saw much more risk than I did. But math doesn’t lie, and they simply didn’t understand it.

TR:

Why not?

CI:

Because there were too many variables and too many analysts that could sway your opinion.

TR:

They’re making it harder for you to beat them these days.

CI:

Not really. The system is so flawed that you can’t get mediocre managers out. Here’s an example: let’s say I inherit a nice vineyard on beautiful land. Six months later I want to sell it, because it’s not making any money. But I’ve got a problem: the guy who manages the vineyard is never there. He’s playing golf all day. But he won’t give up his job running the vineyard. And he won’t let anybody look at the vineyard because he doesn’t want to see it sold. You might say to me, “What are you, crazy? Get the police, kick him out!” But that’s the trouble with public companies: you can’t do it without a very difficult fight.

TR:

The rules make it hard to kick the CEO off your property.

CI:

That’s the trouble: the shareholders of corporations have great difficulty being heard, but at IEP we fight and often win. Once in power, sometimes we find the CEO is not so bad. But the bottom line is: the way public companies are governed is really bad for this country. There are so many rules that keep you from being an activist. There are many barriers to getting control, but when we do, all shareholders, as the record shows, generally do very well. Additionally, what we do is also very good for the economy, because it makes these companies more productive, and this is not just short term. Sometimes we don’t sell for 15 to 20 years!

TR:

What’s the solution?

CI:

Get rid of the poison pills [that issue more stock at a discount if any one shareholder buys too much] and get rid of the staggered board elections so the shareholders can decide how they want the company run. We should make these companies be accountable and have true elections. Even in politics, as bad as it is, you can get rid of the president if you wanted to. He’s only there for four years at a time. But at our companies, it is very hard to get rid of a CEO even if he or she is doing a terrible job. Often CEOs get that top job because they’re like the guy in college who was the head of the fraternity. He wasn’t the smartest guy, but he was the best social guy and a very likeable guy, and so he moved up through the ranks.

TR:

Sometimes you don’t need a proxy fight to change the direction of a company. You bought a lot of stock in Netflix recently, almost 10%, and you made $2 billion in two years.

CI:

That was my son, Brett, and his partner who did it. I don’t know much about technology, but he showed me in 20 minutes why it was a great deal. And I just said, “Buy everything you can!” It wasn’t really an activist play.

TR:

What did you see? What did he show you in those 20 minutes that made you know that the stock was that undervalued?

CI:

Simple: most of the great experts were worried about the wrong thing. At that moment, Netflix had $2 billion in fees coming in every year. But those fees aren’t on their balance sheet. And so, all these experts were saying, “How are they going to get money to pay for content?” Well, they’ve got the $2 billion coming in! And generally subscribers are loyal for longer than you would imagine! It would take much longer than most people thought to put the huge cash flow in jeopardy, no matter what happened.

TR:

But you never tried to take over Netflix?

CI:

They thought they were going to have a proxy fight. But I said, “Reed [Hastings, Netflix cofounder and CEO], I’m not going to have a proxy fight with you. You just got a hundred-point move!” Then I asked them if they knew the Icahn rule. They said, “What’s that, Carl?” I said, “Anybody who makes me eight hundred million in three months, I don’t punch them in the mouth.” TR:

[Laughs.] You cashed out a portion of the stock toward the end of 2013.

CI:

When the stock got to $350, I decided to take some off the table. But I didn’t sell it all.

TR:

What is the biggest misconception about you?

CI:

I think people don’t understand, or maybe I don’t understand, my own motivations. While it may sound corny, I really do think that at this point in my life, I am trying to do something to keep our country great. I want my legacy to be that I changed the way business is done. It bothers me that so many of our great companies are so badly managed. I want to change the rules so that the CEO and boards are truly accountable to their shareholders.

TR:

You and your wife have signed the Giving Pledge. What other types of philanthropy are you most passionate about?

CI:

I give a lot, but I like doing my own thing. I just put $30 million into charter schools because in charter schools the principal and teachers are accountable. As a result, a charter school run correctly gives our children a much better education than they generally get in public schools. We are a great country, but, sadly, the way we run our companies and our educational system, for the most part, is dysfunctional. I hope to use my wealth to aid me in being a force in changing this. Sadly, if we don’t, we are on the road to becoming a second-rate country or even worse.