The Activist Investor Blog
The Activist Investor Blog
How Carl Icahn Works
For one of the most-discussed investors these days, we know surprisingly little about Carl Icahn’s activist investing. Numerous magazine and journal articles profile or mention him. But, unlike Warren Buffett or Peter Lynch, we could find only one book, from over twenty years ago, that covers his investment thinking.
Fortunately, we have abundant data about his activist projects. We studied these projects a bit, to see what lessons other activist investors could learn. We found some surprises.
Carl Icahn has a distinct approach. With a couple of notable exceptions, he avoids mega-cap companies, even though he has the assets and profile to tackle just about any company. He achieves his goals, and superior returns, though publicity, his outsized reputation, and financial clout. He follows-through on his threats less frequently, with few proxy contests. That threat alone means he usually settles with a company, accepting some BoD seats or the promise of a restructuring.
Activist investing since 1994
We used the invaluable SharkRepellent database to identify 114 activist situations at 93 US public companies. The first one dates to 1994, so Icahn runs an average of six projects a year. Given his media exposure, the considerable asset base he needs to deploy, and his reputation as investing only as an activist, we expected a larger number.
More recently, say in the last five years, Icahn led 40 activist projects (eight per year, so he got busier) at 32 separate companies. These include his high-profile campaigns at Apple, eBay, and Dell, and many at lesser-known companies. If we exclude Apple and eBay, the average market cap of these companies is $6.4 billion, smaller than we expected.
Icahn works alone. Since 1996 we count only six situations in which he worked with another investor. In the past five years, he worked on only one: Dell, with Southeastern Asset Management.
Icahn doesn’t specialize in one or a few industry segments. His portfolio companies include manufacturers, information technology, biotech, energy, media, retail, and services.
Many public efforts, few proxy contests, healthy returns
Icahn has a range of strategies for his portfolio companies - BoD restructuring, returning cash, selling a business, or objecting to the sale of a business. He pursues operational changes less frequently, contrasting him with today’s “constructivist” investors.
Icahn publicizes his efforts widely. In the past five years, he filed a Form 13D for 34 of his 40 projects. This requires a 5% position, which helps explain why he targets companies with a smaller market cap that we expected. For the other six companies, he publicized his position widely, through letters to shareholders or news releases of his letters to management.
Icahn also uses social media skillfully. He has a prominent blog and Twitter feed. He appears on financial news shows often, attends many conferences, and talks freely with reporters.
For all his publicity, Icahn eschews white papers and other public exposition of his thesis for a company. He does disclose detail about his public company investment vehicle and its individual holdings.
He escalates his efforts to a proxy contest less often. Of the 40 activist situations since 2010, only 13 turned into a proxy contest. And, of those proxy contests, Icahn either lost the vote or withdrew his candidates about half the time. He won only one, and settled the others.
Despite the mixed success in proxy contests, or perhaps because of it, the overall results favor Icahn. Out of the 40 situations, SharkRepellent deems 36 as closed. In two-thirds of these, we find Icahn achieved most or all of his goals, almost all through some sort of a settlement. Hertz and many other companies added his directors, eBay spins off PayPal and other companies restructured in similar ways, and WebMD and others repurchased shares.
How did Icahn do? Since 2010, the one-year return for Icahn’s portfolio companies was 21% over relative industry benchmarks. The two-year cumulative return was 41% over the benchmark.
What we can learn
Icahn pursues one tactic that others should not: he works alone. Most other PMs should cultivate other shareholders with care.
Icahn applies pressure well. Executives understand the potential consequences of opposing him. Extensive publicity adds to the pressure.
He settles with companies readily. He avoids the allure of winning a proxy contest at a losing company. Instead, he agrees to the changes needed to improve the business, and moves on.
Icahn’s approach, developed over decades, demands funds, energy, and creativity. Even experienced activist investors can learn a great deal from studying his work.
Tuesday, December 16, 2014