Saturday, March 20, 2010

Does Icahn Still Make Them Tremble?

Carl C. Icahn likes to be called an activist investor, not a raider. He has, however, just made a hostile bid for one company, and is in multiple court battles.


Published: March 21, 2010
The New York Times

HE is a billionaire several times over. He has spent the better part of four decades terrorizing corporate chiefs and battling entrenched boards. His name is emblazoned on a stadium on an island in the East River, a laboratory at Princeton, a science center at the Choate Rosemary Hall school in Connecticut and charter schools in the Bronx.

Yet, for all of his high-profile successes, Carl C. Icahn says he feels misunderstood.

"There's a misperception out there that we bust up companies. Or that I believe that all people on boards are bad," growls Mr. Icahn, the 74-year-old investor, as he sets a coffee cup on a small mahogany table in his office on the 47th floor of a Midtown Manhattan tower. "It's just that, in some cases, the C.E.O.'s are so wrong," he grumbles, then quickly flashes a big smile and laughs at his own joke.

While Mr. Icahn likes to pull out his Rodney Dangerfield-esque why-can't-I-get-any-respect? routine, he has over the years perfected the art of stirring up trouble for companies and making money - sometimes lots of it - for his investors and himself.

And while many of his peers from back in the day - names including T. Boone Pickens, Saul P. Steinberg, Robert M. Bass - keep significantly lower profiles these days, Mr. Icahn has not gone quietly into the night.

"He is a survivor," said Chris Young, a director at Institutional Shareholder Services, a Rockville, Md., proxy advisory firm. "If you look at the proxy pipeline, he's involved with a bunch of contentious situations."

On Friday, Mr. Icahn made a hostile offer to buy the Hollywood studio Lionsgate Entertainment; meanwhile, through the $8 billion hedge fund and other assets he oversees - $6 billion is his money - he is waging proxy fights to get new or additional board seats at the biotech companies Biogen Idec and Genzyme.

They are also warring with Donald Trump and debt holders in a New Jersey bankruptcy court over ownership of three casinos in Atlantic City that bear Mr. Trump's name.

In recent months, Mr. Icahn has bought a partly built casino on the Las Vegas strip and the Tropicana Casino and Resort in Atlantic City from bankruptcy.

It is too early to tell whether he will prevail in these battles. But after all these years, a career of victories and occasional misses, one thing can certainly be said of Mr. Icahn: He is one of Wall Street's most colorful, controversial and complicated characters.

Wearing slightly rumpled khakis and waving his eyeglasses to punctuate key points, Mr. Icahn is constantly jumping from one topic to another in an endless stream of dialogue. In that respect, he more closely resembles an absent-minded professor than a master of the universe. Corporate executives visiting his offices walk through hallways adorned with paintings of battle scenes and sculptures of cowboys on bucking broncos. One large painting in the conference room features a lion gazing at the bones of an animal in a desert.Yet he bristles at being labeled a "raider," despite the fact that he is widely viewed as a founding member of the clan that roamed Wall Street in the 1980s, occasionally pursuing hostile takeovers with ruthless abandon.

He prefers to paint his role in those years with the same "activist investor" brush he holds today, arguing that he has created tens of billions of dollars of value for shareholders in companies in which he invested. (In conversations, he declares that he has created $30 billion, $40 billion and even $50 billion worth of value for shareholders. What is a few billion among friends?)

Last year, his hedge fund, highly concentrated in a handful of stocks and bonds, soared 32 percent, after fees, according to a letter sent to investors. That's a reversal from 2008, when it fell 36 percent, including fees. Mr. Icahn's firm declined to provide an after-fees figure.

To some people, Mr. Icahn and activist investors of his ilk are the heroes of the financial system. "They are the ones who are holding corporate America's feet to the fire and incentivizing companies to perform better," said Frank Partnoy, a professor of law and finance at the University of San Diego. Mr. Partnoy contributed to a study that examined activist investing from 2001 to 2006 and found that activists held stocks longer than others and that the companies they pursue often outperform the market. But some fellow activists contend that Mr. Icahn's strong-armed methods of arguing to get on a board and then pushing for a quick change - such as paying a dividend, buying back stock, merging with another company or cleaving off an underperforming unit - are sadly out of date in today's corporate boardrooms. "There are times when you push back and be harsh and times when you roll up your sleeves and work with management, getting more involved with operations," said Eric Jackson, an activist investor in Naples, Fla. "Carl's record on that score hasn't been as successful."

Mr. Icahn and his defenders say he has improved several companies he has invested in or owns. (Besides the hedge fund, he oversees Icahn Enterprises, a hodgepodge of companies he has collected over the years in the automotive, metals and real estate industries.) Late one recent Friday afternoon, Mr. Icahn, a workaholic night owl who rarely appears at glittering high-society functions, dismissed thoughts about going out to dinner with his wife, Gail, or - gasp - taking a bigger break from the business altogether. "What else am I going to do?" Mr. Icahn asked before returning to his office for a meeting on his real estate holdings. "Play shuffleboard?"

IN the spring of 2008, Roy J. Bostock, the chairman of Yahoo, and his fellow directors were coming under a barrage of criticism from investors after Microsoft abruptly broke off merger talks. Mr. Icahn, who had a large stake in Yahoo, jumped into the fray. In a scathing letter to Mr. Bostock, he said the board had "acted irrationally" and "completely botched" the merger. Mr. Icahn's solution included putting up a slate of 10 directors picked by him. (The company eventually settled, placing Mr. Icahn and two of his other nominees on the 11-member board.) What Mr. Icahn did or did not accomplish in his 15 months on the Yahoo board - he stepped down last fall - is the subject of hot debate. But what's surprising about that debate is that one of Mr. Icahn's biggest detractors is Mr. Jackson, a fellow activist investor. And his biggest supporters are some other Yahoo directors.

"I think in the first couple of meetings, there was a lot of trepidation: Will he just be disruptive and not constructive? Can this work?" said Maggie Wilderotter, the C.E.O. of Frontier Communications, who resigned from Yahoo's board last year. "Carl doesn't worry about what people around the table think about him. He's blunt. If there's an elephant in the room, he puts it on the center of the table." And while Mr. Bostock recalled with humor at least one conversation with Mr. Icahn that involved many "four-letter words going back and forth," he said he appreciated Mr. Icahn's persistence and the different point of view he brought to discussions.

"Carl brought financial acumen to the board and a good, solid understanding of the strategic imperatives that faced the company, particularly what it would take to compete longer term with the likes of Google, Microsoft and others from a capital-expenditures point of view," Mr. Bostock said. "It was one of the reasons he was pushing for a Microsoft deal."

But Mr. Jackson, who manages a small activist hedge fund called Ironfire Capital, says Mr. Icahn blew it with Yahoo.

"There was a sense that shareholders were going to go to Sunnyvale with pitchforks," Mr. Jackson said, referring to Yahoo's California base. "He saw that and thought he could ride in on a horse and take control of the company. He didn't realize that he had to articulate to investors what it was he was going to do if he actually had the keys to the car and was driving things." "He's the granddaddy of activist investing. Anyone who practices activist investing has to pay homage to him and the trail that he's blazed," Mr. Jackson added. But "I would say his involvement with the company did nothing for shareholders and hurt his own investors in the stock."

Mr. Icahn said that while his firm did not make money in Yahoo, it was supportive in bringing on board Carol Bartz, the company's C.E.O., and instrumental in eventually forging an Internet search and advertising partnership with Microsoft. As for the criticism from Mr. Jackson that his methods do not work, Mr. Icahn said, "To say that we don't add value is absurd."

MR. ICAHN grew up in a middle-class neighborhood in Queens, and started his first business at the age of 13, when he snapped pictures of neighbors' homes. He developed the photographs in his basement and glued them to the covers of matchbooks that he would buy for 50 cents a box. He sold the boxes to homeowners for $1.50. When he turned 15, he played his own version of the ice futures market as a cabana boy at a beach club, ordering extra ice on hot mornings to sell to visitors who would run out later in the day. After graduating from Princeton with a degree in philosophy and briefly serving as a medic in the Army, Mr. Icahn landed on Wall Street, opening his own brokerage firm in 1968. In the late 1970s, he waged his first proxy battles.

When the buyout barons and corporate raiders ruled Wall Street in the 1980s, he was one of the kings. He made plays for some of the largest companies in America, including Phillips Petroleum, the steel giant USX, Texaco and T.W.A. Some were big victories for Mr. Icahn; others were perhaps more trouble than they were ultimately worth.

"He had a very devil's-advocate way of reviewing investments," said Gary Siegler, who worked with Mr. Icahn from 1985 to 1990. "You had to be able to support your point of view."

After the junk bond market collapsed and boards adopted anti-takeover measures, some raiders moved on in the early 1990s to other things. Mr. Icahn stayed the course, battling for control of the comic book publisher Marvel Entertainment and badgering RJR Nabisco to split its food and tobacco units. Some of his fights in recent years have involved technology and entertainment companies, including Time Warner, Motorola, Blockbuster and the video game maker Take-Two Interactive Software. "He's had a mixed record on returns" and in understanding the evolution of the media business, said Matthew Harrigan, an analyst at research firm Wunderlich Securities who is watching Mr. Icahn's moves against Lionsgate. Among other things, Mr. Icahn is angling to get his son and fellow chess player, Brett, who works at Mr. Icahn's company, on the studio's board.

Associates of Mr. Icahn say that his company made money on its Time Warner investment and that while his Motorola investment has not gone as well, they believe it will eventually pay off.

"We hold these things for a long time and the jury is still out," Mr. Icahn added.He has fared better in some of his biotech holdings, which make up a big chunk of the hedge fund's investments.

"The biotechs have been his big winners recently," particularly investments in ImClone Systems and MedImmune, said Mr. Young at Institutional Shareholder Services. "His thesis, which is no secret, is that biotech firms should be purchased by Big Pharma, which is always in need of new products. In his mind, that's a match made in heaven." Mr. Icahn says he has also made money in industrial and gambling companies he has acquired out of bankruptcy and nursed back to health.

He said that a couple of years ago, for instance, his company booked a $1 billion profit after selling gambling properties, including the Las Vegas Stratosphere hotel and casino, that it had picked up largely in bankruptcy proceedings. Similarly, he made an additional $1 billion or so selling energy companies he had acquired years earlier.

In those cases and others, Mr. Icahn argues that he is not given enough credit for holding companies for long periods and investing even more of his own money into the businesses to help them grow. He specifically cites his investments in a rail-car business and the automotive parts supplier Federal-Mogul. "What gives me the greatest excitement and joy is building a company," Mr. Icahn said. "By the way, it's also the way to make the most money."It may not, however, be the easiest way to make a buck. One of the companies in which he owns a majority stake - XO Communications - has been fighting lawsuits by R2, a Fort Worth, Tex., fund controlled by a hedge fund called Q Investments. The hedge fund is run by Geoffrey Raynor, a former investment banker who worked for the Bass family of Texas. R2 accuses Mr. Icahn of engaging in "sweetheart" transactions and "self-dealing" in his oversight of the communications company.

In another suit against Mr. Icahn, Mr. Raynor, through another fund, contends that "material misinformation" was included in a recent $2 billion bond offering. Mr. Raynor declined to comment for this article.Mr. Icahn, who denies all of the accusations made against him, filed his own $100 million lawsuit against Mr. Raynor recently, saying Mr. Raynor's lawsuit caused economic harm to the bond offering. Mr. Icahn called Mr. Raynor a "serial sue-er," and in a court document he contends that the hedge fund has filed 45 lawsuits against various parties in the last four years.Disputing that figure, a spokesman for Mr. Raynor says that in the last 10 years, the firm has been a plaintiff in 16 non-bankruptcy proceedings, along with the two legal disputes with Mr. Icahn.

"I've put $1 billion into this company. I don't get a salary, and I spend hours on it each week," Mr. Icahn said, his tone rising in frustration. "About $80 million of the company's revenues each year are coming from introductions I brought in."

Later, as further proof of his involvement with the communications company he proudly showed off the latest addition to a row of awards arrayed on a cabinet just outside his office. It is a large glass cup engraved with his name, declaring him XO's "salesman of the decade."

LATE last year, Donald Trump was sitting in his office when he was alerted that Carl Icahn was on the phone. Mr. Icahn told him that he had joined the Texas banker D. Andrew Beal in his effort to gain control of three Atlantic City casinos bearing Mr. Trump's name, acquiring a majority of the first-lien mortgages held by Beal Bank."He told me he was doing it because he heard I wasn't involved, but he knew I was involved, that I had a deal with bondholders," Mr. Trump said. "I was very surprised and also very disappointed that Carl got involved," Mr. Trump added. He said the two had been friends for years and that Mr. Icahn had sought his advice when he was divorcing his first wife. Mr. Trump said the two had not spoken since the call."I should be the one that is surprised he is upset," Mr. Icahn said. "I might possibly feel bad had I interfered at a time when he was running the business," but that's not the case, he added. "Additionally I find it odd that he's now claiming to be my good friend," Mr. Icahn said. "I was not surprised when I was not invited to his daughter's wedding precisely because we are not good friends."

The Trump casino deal shows that Mr. Icahn is not afraid to take on big names if there is money to be made. He also makes it clear in other dealings that he is aggressive in protecting his interests.

Consider the case involving the activist manager William A. Ackman. Mr. Ackman's fund, Gotham Partners, has sued a company owned by Mr. Icahn over a profit-sharing agreement between the men that was made about seven years ago.

According to court documents, Mr. Ackman sold his investment in Hallwood Realty to Mr. Icahn in 2003 with an agreement that if the assets were sold or transferred at a profit within three years, Mr. Ackman and his fund would get a share of the action. The assets were sold about a year later and, in an interview, Mr. Ackman said Mr. Icahn owed him about $4.7 million. The New York Supreme Court found in favor of Mr. Ackman, and the First Department appellate court affirmed that decision. Mr. Icahn has not paid any of the money and is disputing the legal fees, which with interest bring the total owed to $8 million Mr. Ackman said. "I call it my Carl Icahn money market account," he said. "I don't get these sort of rates anywhere else." Mr. Icahn responded that "I never agreed to give him the profit he now claims, and the case will be appealed."

Mr. Icahn does not seem to let anything, including a very close friendship, get in the way of protecting his and his investors' profits. Late in 2008, through his hedge fund, he sued Realogy, a real estate company controlled by Leon Black, the head of the private equity firm Apollo Management. Mr. Black was trying to reduce Realogy's hefty debt load by offering to exchange some of the debt with bondholders. Mr. Icahn, a bondholder who has known and been friends with Mr. Black for decades - the two have been longtime tennis partners - objected to some terms of the exchange and sued.

"Carl and I have been good friends for over 25 years," Mr. Black said in an e-mail message. "Occasionally we skirmish as couples are wont to do, but I believe we both feel that when the chips are down that the friendship is paramount."

How, exactly, does one sue and still be good friends with someone on Wall Street? Mr. Icahn smiles sagely over his cup of coffee: "The two of us have a saying that we always use whenever there is friction in our business dealings. We always say, 'there's only one Maltese Falcon.' "At one point in that classic 1941 film, a character chasing a valuable figurine says to a close associate, "You've been like a son to me," Mr. Icahn explains, paraphrasing from the movie.Then, lowering his voice with mock intensity, Mr. Icahn adds that the character says that if you lose a son, it's possible to get another - "but there's only one Maltese Falcon.' "

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