Investment Greats: Carl Icahn

Published in Investing Strategy on 12 June 2009

Corporate raider, activist shareholder, and general thorn in the side of management, Carl Icahn has accumulated a net wealth estimated at $9bn.

Carl Icahn has gathered a keen following of both supporters and detractors over the years.

His United Shareholders of America campaign, promoted through his website The Icahn Report, aims to improve corporate governance by changing the laws to make CEOs and boards more accountable.

Background

Born in New York in 1936, Icahn was the first student from his high school to be accepted to an Ivy League university, graduating with a degree in philosophy from Princeton. His studies were funded, in part, from his success at the poker table.

Pursuing his mother's dream that he should become a doctor, he then enrolled in medical school, but dropped out after a couple of years deciding it was not for him. After a brief stint in the army, he commenced a career on Wall Street in 1961.

Early career

Starting in convertible bonds, a bull market and lots of leverage allowed him to make more in a week than his father made in a year, but this success was short-lived: In 1962 he lost everything, and went back to the drawing board.

Returning to the market again, he decided to focus on options and arbitrage opportunities, and bought a seat on the stock exchange with the help of an uncle.

Eventually his focus shifted more towards identifying companies that were undervalued because of poor management, building up positions in those companies, and agitating for change.

Investing style

Icahn is convinced that the majority of American companies are examples of what he calls an anti-Darwinian 'survival of the unfittest'. CEOs get to the top by being likable, politically astute, and not rocking the boat. "The best and the brightest don't get to be at the top of the corporate ladder". Compounding the problem, CEOs tend to employ people who won't be a threat to their position.

This results in companies that under-perform. "You look for the reason that they're cheap, and the major reason is often and usually very poor management."

His solution to that problem is to buy into these businesses, campaign to overthrow the CEO or the board -- what is known in the United States as a proxy battle -- and make the company a more desirable target for other companies to take over.

Recent examples of this include ImClone Systems, where Eli Lilly outbid Bristol-Myers Squibb to take over the business for $6.5bn, and MedImmune, which was taken over by AstraZeneca (LSE: AZN) in 2007 for nearly double the price at which he bought it. Sometimes the preferred method is to split up the business, which he has been pressing for at Motorola, and previously at Time Warner.

Some observers have referred to the 'Icahn Lift' -- the boost in share price that comes as soon as he is known to be interested in a company.

Often described as intimidating and tenacious, Icahn enjoys a fight, and in common with many of the great investors he sees himself as a contrarian. "The more people that think you're wrong, the better you're going to do in the long run."

How does he identify the companies to attack? Having spent his life doing it, he says it's now often more instinctual, but he still has an army of lawyers poring over covenants and bylaws to see where companies are vulnerable.

It hasn't all gone his way, of course, and his $9bn personal wealth is down by a third in the past two years.

Current positions

Although he has a significant stake in Yahoo!, he failed in his attempts to get the company to sell to Microsoft, but he did win a seat on the board.

In recent days he won two seats on the board of Biogen, following a long battle. He has been extremely critical of management performance and compensation, and wants to break the company up. His other main shareholding is in Motorola.

At the moment, Icahn is generally cautious on equities. "You have to be very cautious … it's dangerous to own equities." He bought high-yield debt in companies such as MGM during the height of the crisis, but has since sold some of that at a profit.

In his view, there is about $6 trillion more debt in the US economy than it can sustain, and that makes him very nervous. And while he's worried about the dollar, he has concerns for other currencies too, but be he doesn't really play the currency markets as that is not his area of expertise.

Campaigning

His attempts to shake up companies are usually resisted by the incumbent management, and Icahn wants to make it harder for management to use company resources to defend their positions. He also wants to see the positions of CEO and Chairman separated.

The differences in laws between the various US states complicates the situation, and helps boards to frustrate his efforts. He regards the legal environment in Britain to be more conducive to good corporate governance.

While that may be the case, there are many within the Motley Fool community who are less than satisfied with the behaviour of our companies' boards. And just like Carl Icahn -- albeit without the billions of dollars -- they are making their presence felt. You can join them on our discussion boards.

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