Carl Icahn’s investment strategy

Carl Icahn is one of the most successful figures on Wall Street. In the 1980s, this corporate predator using Drexel Burnham’s junk bonds was called a vulture capitalist. He held a position in a listed company and initially required extreme changes in the company’s leadership and management style. Usually, the target will pay him “green mail” money and stipulate that he will stay away from the target.

However, by the end of the 20th century, his reputation had changed because he became a shareholder activist. Investors follow in his footsteps and buy the businesses he cares about. The stock price rise caused by the expectation that Icahn will reveal shareholder value is called the “Icahn Elevator.”

Investment philosophy

Icahn once said: “My investment philosophy, in general, except for exceptions, is to buy things when no one wants them.” More specifically, as a contrarian investor, he recognized that stock prices reflect bad P/E ratios. (P/E) or a company whose book value exceeds the current market valuation.

Icahn subsequently aggressively acquired important positions in the company, either calling for the election of a new board of directors, or the divestiture of assets in order to create more value for shareholders. Icahn is publicly concerned about CEO compensation, saying that he believes that the compensation of many executives is seriously too high, and that their compensation has little correlation with stock performance.

starting point

In 1979, Icahn’s first victory was an acquisition through Tappan’s proxy voting. Soon after winning a seat on the board of directors, he designed a deal that doubled his initial investment and sold the company. Soon after, he targeted Marshall Fields and Phillips Petroleum, both of which were struggling to escape his control, and both companies received substantial returns.

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TWA is the culmination of Icahn’s early efforts. In 1985, he took over the airline once controlled by Howard Hughes. Soon after, TWA acquired several small regional airlines because Icahn tried to use the airline’s efficiency gains to create greater profits. In 1988, he privatized the company through a $650 million stock repurchase program, which allowed him to recover almost all of his $469 million investment. This also put TWS on a debt of US$540 million. Soon after, the airline’s most valuable routes will be sold to competitors, and the weakened business was announced in Chapter 11 in 1992, and Icahn left the company early the following year.

During this period, Icahn negotiated to obtain airline vouchers from the company to replace the US$190 million owed to him by TWA. Because the deal included a rule that he could not sell these tickets through a travel agency, Icahn founded, where he both sold tickets and set off a revolution in the travel industry.

Reflections on the TWA experience

Icahn’s experience with TWA will guide him to focus mainly on making profits through potential stock price increases, which are usually achieved through divestitures or complete liquidation. Another result is the direct payment of green mail to Icahn. The method used was first to buy a large number of shares in the company, and then to propose a series of directors, including Icahn and his allies.

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An example of his business model is that he forced USX, a corporate descendant of Andrew Carnegie U.S. Steel Corporation, to spin off its steel manufacturing division and instead focus on the petroleum business through Marathon Petroleum, which used to work for John D. Owned by Rockefeller. In 1991, with the emergence of the second category of USX stocks representing the steel sector, both stocks rose 28%.

Icahn’s deal also included his role as a catalyst in the battle between Pennzoil and Texaco. There, Icahn accumulated more than 13% of Texaco’s shares, but failed to control the board of directors. However, the final agreement between the litigation companies caused the share prices of both parties to rise, bringing Icahn a windfall.

More recent successes

In another notorious battle, Icahn accumulated a 7.3% stake in RJR Nabisco in the late 1990s. Then, he launched a proxy dispute, both to gain control of the board of directors, and to force the company to dissolve. Although his efforts were unsuccessful, but because the company’s management received the support of investors, he achieved victory through the extraordinary profit of the investment, which was enough to increase Icahn’s investment portfolio by 100 million US dollars.

In a similar attempt, Icahn failed to force Time Warner to split its business into four independent public companies, a department he campaigned for in 2006. Despite the rejection of the company’s other major shareholders, Icahn not only made huge profits from his investment, but also put pressure on him. The company elected two independent board members and promised to take cost-cutting measures.

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Another example of Icahn’s impact on stock prices is the investment in Netflix in the fall of 2012. According to his contrarian philosophy, Icahn accumulated more than 10% of the company’s shares when the company was nearing its 52-week low. After he disclosed his shares in the company in a regulatory document, “Icahn Elevator” soared the stock by 14%.

Bottom line

Carl Icahn’s description ranges from vulture capitalist to man in green. He is known as the Gadfly and shareholder activist. In fact, his philosophy and strategy have not changed much in the past 30 years. During this period, he rose from a stockbroker to one of the most influential participants on Wall Street.

Similar investors, such as T. Boone Pickens and Saul Steinberg, have adopted tough strategies when competing with the boards of undervalued listed companies. However, Icahn’s armament money comes not only from the profits he has accumulated from past transactions, but also from his creation of a multi-billion-dollar master limited partnership called Icahn Enterprise LP. This investment tool provides Icahn with additional resources in addition to his huge personal wealth, which can be used for strategic investment, which is the power behind the “Icahn Elevator”.


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