Note: While reading a book whenever I come across something interesting, I highlight it on my Kindle. Later I turn those highlights into a blogpost. It is not a complete summary of the book. These are my notes which I intend to go back to later. Let’s start!
Icahn’s first experience with a Wall Street boom-to-bust cycle was certainly a disappointment, but it also taught him two lessons he never forgot. First, no one makes money playing the market. A small investor dabbling in stocks is always vulnerable to bigger, more powerful forces that time after time will wipe him out. Second, if he was going to emerge as a dominant force, he needed more than a broker’s training. He had to gain expertise in a market niche overlooked by the hordes of brokers content to sit by the phone and take orders. His study of empiricism had taught him that “there is a strategy behind everything,” and now he had to determine what that strategy was. Unlike his peers, who viewed the peaks and valleys of the stock market as an inevitable part of the business, Icahn the empiricist, Icahn the chess player, was determined to outsmart the system or at least to find a void he could exploit.
“It is our contention that sizeable profits can be earned by taking large positions in ‘undervalued’ stocks and then attempting to control the destinies of the companies in question by: a) trying to convince management to liquidate or sell the company to a ‘white knight’; b) waging a proxy contest; c) making a tender offer and/or; d) selling back our position to the company.” With this “Icahn Manifesto,” the one-time bookworm from Queens had found a way to intimidate corporate America, driving the CEOs of the Fortune 500 into a corner, using his opponents’ own greed and imperiousness to defeat themselves.
Because corporate management was inclined to repel takeover attempts regardless of the positive impact they might have on shareholder values, Icahn was betting that the barons of the executive suites would prove to be his reluctant allies. Threaten their privileged lifestyles and they would use the shareholders’ money to buy him off, either by paying greenmail (which is a premium for a raider’s shares over the current market value) or by finding white knights to acquire their companies by making above-market price bids for the outstanding stock. Either way the would-be raider would walk away with a quick and handsome profit. Icahn had detected a weak link in the capitalist system, and he would exploit it with enormous success over the course of a tumultuous decade in American business.
Icahn recognized that while a proxy contest could be used to gain control of a company (and ultimately to build it into a more profitable enterprise), much faster profits could be earned by simply appearing to seek control. By acquiring big stakes in companies whose asset values substantially exceeded their share prices and then launching proxy battles, Icahn would be calling attention to the gap between market and inherent values. This gap existed in hundreds of public companies because Wall Street tends to rate stocks on the basis of earning potential, as well as on asset values. From Icahn’s perspective, blame for the gap rested with management, which, through incompetence or arrogance, failed to maximize the companies’ financial performance. If all went according to plan, cash-rich vultures would recognize the inherent value in the Icahn targets and would engage in bidding wars for them, rapidly inflating the value of Icahn’s holdings. In another, equally attractive scenario, frightened management would offer to buy out Icahn at a substantial profit over his per share cost. Either way, Icahn the catalyst would walk away with millions of dollars in proxy spoils.
On November 16th, two phone calls—one from the Wall Street Journal and another from a shareholder—alerted Tappan management that an Icahn 13-d was imminent. Seeking to confirm what was still just a rumor, Blasius called Icahn a day later, informing him of the phone calls and of a related report that Icahn’s most recent 40,000 share block had been purchased from Walter Kidde & Co. When Blasius sought to pin down Icahn’s intentions concerning the SEC filing, he ran smack into Carl’s double-talk, another component of the Icahn modus. As he rambles on, apparently confused by the events and the details before him, he draws his opponents into a labyrinth of thoughts and speculations that leaves them as confused as Icahn appears to be. What his adversaries fail to detect, until they are well into the game, is that he has personally created the labyrinth and has carefully plotted every route of escape. Sitting across the table from Icahn, Blasius could not have known this. His memo concerning a November 17th conversation offers a clear insight into Icahn at work, weaving his web. “He said he was confused by the whole situation—they had not filed a 13-d because his attorneys had not come back to him yet. He did indicate, however, that probably would still be doing so and, also, might buy some more stock, but would call us as he had indicated before he would, if and when such a filing were made.” In the course of the conversation with Blasius, Icahn began to hit his stride as a master strategist, throwing open the possibility of his moving in every direction at once. He might buy more stock but then again he might not. He might file with the SEC, but then again he might not have to. He planned to remain more or less a passive investor, but he was on the verge of buying even more stock. He would like to interest a third party in acquiring Tappan, but he suggested a preference for a management-led buyout. In spraying the negotiations with a thousand possibilities, Icahn creates a complex environment in which he can camouflage his strategy. What does Carl really want? Which direction is he headed in? By tossing out dozens of variables, he leaves everyone guessing. The more his adversaries try to figure him out, the more he opens new channels: some dead ends, others viable options. It is in this context, where less accomplished negotiators look for symmetry and consistency, that Icahn thrives.
Much as they deny it, CEOs and their boards of directors come to view the companies they run as their own. Should an outsider threaten their prerogatives, they will do everything in their power to repel him. This insiders vs. outsiders mindset violates both the spirit of the corporate democracy and the fiduciary responsibility boards of directors owe to a company’s shareholders. Although the idea of having a gadfly on the board—one who would seek acquisitions or lobby for buyouts—is considered to be heresy among the corporate establishment, viewed from the standpoint of the shareholders’ interests, it makes all the sense in the world. In all likelihood, it is the gadfly alone who will uncover opportunities to maximize shareholder values through unconventional means, including mergers and breakups, that may reward everyone but the handful of overpaid executives living high off the corporate fat.
- From the earliest days of his career Icahn viewed trust as a weak and dangerous concession that had no place in business negotiations. Viewing the world through skeptical eyes that see every man out for himself, regardless of his assertions to the contrary, Icahn prefers to confront transactions with a worst-case mentality. Before making a move, he surveys the chess board, asking himself, “What is the worst thing my adversaries can do to me and how can I protect myself on all flanks?” In planning his strategies, Icahn looks to three checkpoints simultaneously: his goals, weak points and his leverage.
As Carl checked his position in the spring of 1979, his goal—to collect substantial profits by engineering an acquisition of Tappan—remained constant. So did his leverage as a major owner of the company’s shares and as a determined catalyst for change. But if the serially preferred shares were issued, his leverage would diminish and his downside risk would grow. Rather than placing his trust in management’s intentions, Icahn was determined to bolster his leverage by winning a place on the board and using that position both to defeat the plan to issue preferred and to mount a more aggressive campaign to sell Tappan for a substantial premium over its market price.
- Icahn’s profit on the Tappan deal was minuscule compared to the huge gains he would earn in the eighties, but his philosophy about corporate values had been proven correct. Clearly a glaring disparity had existed between intrinsic value and stock market value. A catalyst for change had successfully narrowed that gap, producing rapid gains for himself and, incidentally, for all of the shareholders.
The Icahn/Kingsley theory had been proven in the crucible of the real world: Focus the market’s attention on the disparity in values, and someone—most likely management or a white knight—will buy you out. It was one of those elegant ideas that is at once simple and powerful.
- Pressed to explain his single-minded focus on work and on creating ever greater personal wealth, Icahn’s face twists up in a question mark, as if he is at a loss to explain his own compulsion. But then he refers to an essay, “The Special Dangers of High Commercial Developments,” written more than a century ago by Walter Bagehot, former editor of the Economist magazine: “We often talk as if the haste to be rich, the mere desire of wealth, were the only motive power in these great speculative transactions which, when they fail, cause so much misery and so much scandal. But no mistake can be greater. We do not for a moment mean that the desire to be rich, the passion for making wealth, is not far too great—and in a considerable measure the cause of the speculative rashness we see. But it is not by any means the sole cause, hardly, perhaps, even the chief cause. “We find as a rule that the men who can handle large armies well are apt to favour war when any international question arises which involves war; and if this be so, how much more natural it is that those who can handle or who think they can handle, great commercial combinations well, and who of course anticipate from them, not the misery which war always causes even to the victor, but the satisfaction and employment which useful commercial enterprises bring, should feel a bias of which they are unconscious in favour of the exercise of their faculty, and against the timid counsels which would have them keep within the strictest limits of prudence.”
Clearly, Icahn believes that his capabilities as “a man of commerce” are too great to be restricted by pedestrian concerns or by “timid counsels,” meaning anyone who fails to see the grand scheme of his work. Including, perhaps, his wife. “Sometimes, I feel there is no reason he really should work anymore but then where is he going to go from here,” Liba said. “In regular families, the husband works and there is always something financially to look forward to. They are building, building. “But here, how much more money he makes is not going to make any difference. The point is that he doesn’t need any more money. “But it’s the game, as he says.”
- Even at this early point in his career, Icahn began to demonstrate traits that would distinguish him from the pack of takeover bullies who would come to prominence in the 1980s. Unlike his peers—men who would pursue corporate prey without apologies to anyone—Carl Icahn found a need to justify his actions. Repeatedly he would tell the press that his cause was more than the accumulation of personal wealth. It was also, he claimed, a campaign to remove the insulation surrounding corporate management and to make America’s CEOs and their boards accountable to the shareholders whose companies they had come to treat as private treasuries.
- “I feel strongly about corporate democracy, about shareholders having more say in what they want from their investments,” Icahn told Business Week in June 1979. “When a company’s performance is poor, something should happen to that management to ensure a return for the shareholders.”
- Icahn’s need to couch his motives in the framework of “shareholder rights” can be traced to two factors. First, Michael Icahn’s constant railing against robber barons, against the gross imbalance between the haves and the have-nots, had instilled a genuine sense of outrage in his son. From Carl’s perspective, the real parasites were not the takeover bullies but instead the corporate CEOs. That this dovetailed nicely with his personal financial interests made it all the better. No matter how wealthy he would become, he would regard himself as a Robin Hood rather than as a robber baron. Related to this, Icahn was convinced that the corporate establishment was distorting and therefore endangering America’s capitalist system. If boards of directors deferred to CEOs, and CEOs pursued their own self-interests above all else, America’s shareholders were no better off than the early colonists who were forced to endure taxation without representation. Unless those shareholders were given a practical voice in the disposition of their companies, corporate democracy in the U.S. was a sham.
Icahn held up the role he was now playing as the ideal solution to the problem. “A guy who owns a 30 percent stake in a public company and then plays a role in maximizing that company’s return to the shareholders plays a vital role in the system,” he said. “Because unlike the CEOs, he’s not in it for the Gulfstream jets and the country clubs. He’s not in it to see how many people, how many legions, he can have reporting to him. He’s in it to protect that 30 percent investment and to make it grow. That’s why he is so valuable a force to the company. Because if he doesn’t like what’s going on—if earnings are down or something else is wrong—he’s going to come into that company and make certain that whatever is broken gets fixed. And because his presence is felt, the CEO isn’t going to be able to go fishing or to the golf club or to take his spouse on a jaunt to Paris. He’s not going to be able to do that because unless things are going gangbusters, the guy with the 30 percent is going to say, ‘Hey, what the hell are you doing? Why aren’t you here?’ “For business to function properly, you need that accountability. But too often in today’s big publicly-held corporations, management just does what it wants. There is little or no accountability to the shareholders and that’s why the economic machine isn’t working.”
- “In many big corporations, the person who makes waves, who gives criticism, who does things to rock the boat—hell, he’s a persona non grata,” Icahn said. “The guys above him who are worrying about their jets and their other perks see to it that he’s kept down in the ranks. That he doesn’t make trouble. “In most cases, boards don’t rock the boat either. They just come to get their paychecks. They don’t rock the boat because they are members of each other’s boards and each other’s compensation committees. Everyone is watching out for everyone else. “You have to understand how the system is structured. The guy who gets to the top of the big corporations is, with notable exceptions, a political animal. He’s a survivor. He knows how to watch his back. That means hiring a number two guy that’s not as smart as him. That works for the CEO because he’s never threatened by his second in command.
“But think what that does to our corporate establishment. If the number two guy is always a little worse than the number one guy, sooner or later you’re going to have a country run by a bunch of morons. In American business we have a reverse Darwinism that provides for the survival of the unfittest.”
- But for Icahn and Kingsley personally, Hammermill had taught a lesson they would never forget. “Hammermill was a tough one because we couldn’t finish it,” Kingsley said. “We couldn’t raise the money to finish it off. During the course of the standstill, we were trying to raise the money but it wasn’t there. We lost our clout because we didn’t have the money to go all the way.”
In the chess game they were playing, Icahn and Kingsley knew that the ability to go “all the way” was critical.
- As with the Phillips negotiations, Icahn scheduled late-night meetings so that he could attack his adversaries when they were bush-tired, mushy-brained and eager to go home.
- “I remembered a meeting during the TWA negotiations that was scheduled to start at 9 P.M.,” recalled TWA’s investment banker, Mike Zimmerman, of Salomon Brothers. “As it turned out, Carl didn’t show up until eleven. While everyone else was negotiating, he went home, napped and showered. By the time he made his entrance, the TWA people looked like trash and Carl walked in looking like a million bucks.”
- “Carl wears you down,” said former pilots’ representative Tom Ashwood. “He negotiates into the night. Five, six, seven hours. He’ll ramble on about baseball and artificial insemination. Then when you lose your train of thought, he’ll pick up right where he left off, hammering at a point he wants to make.
“He is impossible to deal with. When you think you have fully reached an agreement with Carl, you come back to the table after a break and there is no deal. Because he’s changed a number or added a hitch that throws everything out of whack in his favor. If you say five, Carl says six. Say six, he says seven. Say seven, he says eight.”
- Another Icahn gambit is to prepare his opponents for an all-out fight.
- “One time when we were negotiating, Carl told this story of his high school days when a bunch of tough Irish guys were bullying him, pushing him around, trying to intimidate him,” recalled William Jolley, a partner with Jolley, Walsh & Hager, attorneys for TWA’s flight attendants. “But one day Carl says he turned on one of the toughs in a stairwell and either through physical violence or threats, made them see that they could never do that to Carl Icahn again. This is Carl’s way of telling you that no one messes with Icahn and wins. In the end, he’s saying, I’ll get you. I’ll get you.’”