Icahn't Should Hang It Up

By Eric Jackson 10/28/09 - 06:01 AM EDT

Stock quotes in this article: YHOO , MSFT , MOT , CIT , BBI , TELK , GFGFQ , CSCO

NEW YORK (TheStreet) -- After a string of disastrous investments and his departure from Yahoo!'s(YHOO Quote) board last Friday, it's time for Carl Icahn to hang it up running other people's money. Here's why.

Icahn's decision to leave the Yahoo! board comes a year after mounting a costly and distracting proxy contest to get elected. That's his right, of course. After all, investors in his Icahn Partners hedge fund were the ones who footed the bill for his efforts.

Those same investors -- including Icahn himself -- are also sitting on a loss on their Yahoo! investment. We don't know the exact magnitude of the loss but it appears, based on a review of the SEC filings, to be on the order of -23% or roughly $320 million on 60 million shares held at the end of June. Icahn's stated reasons for stepping down from the board were that he no longer had the time and Yahoo! no longer needed an activist.

If he's right, then someone should inform Icahn's buddies John Chapple and Frank Biondi, who came on Yahoo!'s board last year with Icahn. Their whole legitimacy for serving on this board is now in question based on Icahn's comments. They should make like their buddy and head home to Manhattan. And with Yahoo!'s stock at less than $17, far less than Microsoft's(MSFT Quote) offer of last year, it seems incorrect and premature to declare the company a success and not in need of further changes.

Yahoo! investors might correctly wonder: Why the heck did we elect you to represent our interests in the first place, if you're now leaving?

It's true that Icahn's busy tending to other investments in his portfolio with the aim to turn around the performance of Icahn Partners. The fund, which had a three-year positive run starting in 2004, reportedly showed its first loss in the third quarter of 2007, due to poor bets on Florida condo developer WCI and auto parts maker Lear(LEARQ Quote). Since then, WCI and Lear have gone bankrupt, costing Icahn's fund at least a couple of hundred million dollars.

Icahn's hedge fund performance continued to drop in 2008 (down 22% in Q4 alone) and 2009 (down 33% in January). His 60 million Motorola(MOT Quote) shares -- owned since at least December 2007 -- look to be down about $660 million. Motorola's decline came despite Icahn having fought for and winning board seat representation last year.

Icahn Partners was hit by $1 billion in redemption requests at the end of last year and Icahn injected $250 millionof his own money earlier this year. Even today, Icahn Partners' long positions total $2.7 billion through the end of June . That's significantly less than the $4.9 billion in long positions he heldone year earlier .

Icahn's strategy is to take large long concentrated equity positions without using options or pair trading to manage the additional risk, as well as buying up cheap debt. You can ride that train up when markets are good, but get crushed in a down year like last year.

The biggest thing taking up Icahn's time these days is an investment in CIT(CIT Quote). Some are reporting that he will become the biggest shareholder of the company under reorganization. Creditors will decide by Oct. 29 whether to push the company into bankruptcy or accept an offer to refinance its debt. Icahn wants the company to refinance its debt through him, saying the fees he'd collect from the company would be less than the other offer on the table.

Icahn likes buying up debt and bringing companies through the bankruptcy process. He followed a similar path to the one he's on with CIT at XO Holdings(XOHO Quote). In that instance, he effectively gained control of the company as a large debt-to-equity owner.

But he's being sued right now by R2 Investments, an 8.8% holder in XO. R2 contends Icahn turned down at least one buyout bid for the company higher than its then share price in favor of refinancing its debt by purchasing $780 million of preferred stock. In doing so and gaining 80% control of XO, R2 alleges Icahn was able to use the company's losses to offset taxes he would have otherwise had to pay on other businesses he owned. XO, which was trading at $1.27 at the time of the buyout offer that R2 says Icahn turned down, is now trading at $0.77 - a 39% decline.

Besides recent poor investments in Blockbuster(BBI Quote), Telik(TELK Quote), and Guaranty Financial(GFGFQ Quote), his entire Yahoo! foray since last year has been an unqualified failure. It will make future activist campaigns he launches more difficult to execute.

From the moment he launched his proxy fight last year, after Yahoo! turned down Microsoft's $34 a share verbal offer, investors were skeptical of Icahn. They perceived him as a quick flip artist wanting to juice the stock from $23 to over $30, without technology experience to effectively advise the company as a director.

Because he lacked support from institutional investors, Icahn knew his proxy fight might fail to get any of his nominees elected when put to a vote. Therefore, he accepted three seats on the board as a compromise. If you can't win against the wildly unpopular Yahoo! board after making a mess of the Microsoft negotiations last year, what does that say?

Icahn says he helped select Carol Bartz for the top job. Really? Wouldn't Jerry Yang have done it anyway? After all, it was Jerry who offered Terry Semel the top job in 2001. It was Jerry who got to be CEO in 2007, when he told his board he wanted it. And, it was Jerry who knew Carol from Cisco's(CSCO Quote) board and, by Carol's account, offered her the job.

Icahn's friend, Frank Biondi, got to hitch a ride on to Yahoo!'s board on Icahn's coattails. Biondi also joined Yahoo!'s compensation committee and approved Bartz's employment contract. This is the contract that will pay Carol $187 million for four years of work, if she hangs around that long, maxes out her possible annual bonuses, and if Yahoo!'s stock price rises above $25 for 20 consecutive trading days before 2016. That's a good deal for Carol -- not so great for Yahoo! shareholders.

We know that Icahn Partners' investors didn't get a great deal on Carl's involvement with Yahoo! over the last year. However, Icahn, Biondi, and Chapple seem to have done pretty well. According to Yahoo!'s proxy filing, the day these three men were elected to the Yahoo! board, Yahoo! gave each an option to purchase common stock with a grant data fair value of about $250,000 and restricted stock units with a grant date fair value of about $200,000.

This half-a-million-dollar payment went to them personally. Nowhere in the filing does it say that this money went back to Icahn Partners, which funded the expenses related to the proxy contest -- which most estimate cost at least $1 million.

In that same proxy filing, Yahoo! disclosed that, last year, "transactions in the ordinary course of business between the Company and entities for which the following directors served as an executive officer, employee or substantial owner, or an immediate family member of an executive officer of such entity" included "Mr. Icahn". No more information is given, but it would be interesting to know just what transactions were conducted, with whom, for how much, and for what services.

To most outsiders, it appears as though Icahn was summarily ignored by the parties around Yahoo! before and after he was elected to the board. He assumed that he could force a shotgun marriage between Microsoft and Yahoo! He assumed his initial $23-a-share investment could be quickly goosed to $32 or higher. He was wrong.

Steve Ballmer politely listened to him and then apparently stopped taking his calls. Carol Bartz has dissed him from the get-go of her tenure as CEO. She proclaimed to Forbes last year : "Icahn is just another shareholder. What's he going to do, fire me?"

Whether he realizes it or not, this attitude is probably the most damaging thing to Icahn going forward as an activist investor. CEOs and corporate boards will no longer see him as "Carl Icahn: Corporate Raider of the 80s" but "Carl Icahn: Has Been." In their eyes, he'll be Icahn't, not Icahn.

Carl Icahn will always have a reputation as a successful investor. Forbes recently pegged his net worth at $9 billion. Yet, it's unclear whether his hedge fund, Icahn Partners, will continue after his death.

While George Soros, 79, and Julian Robertson, 77, have repeatedly developed talented managers (like Stanley Druckenmiller, Lee Ainslie, and John Griffin) who go on to successful careers, Icahn, 73, has not. If Icahn was hit by the proverbial bus tomorrow, it's unclear that Icahn Partners could or would continue.

Icahn will always be able to grab the headlines with some outrageous comment about a CEO because he's become the "poster boy" for activist investing. He could keep running money and probably will. However, as he takes his leave from Yahoo!, it appears as though his most influential days as an activist investor are behind him and not in front of him.

-- Written by Eric Jackson in Naples, Fla.

At the time of publication, Jackson's fund was long Microsoft.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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