Posted by Carl Icahn August 12, 2008 : 1:29 PM
There will always be those who will defend the status quo in corporate governance and attempt to justify the indefensible. The Aug. 1 Wall Street Journal op-ed article, "Why Carl Icahn is Bad for Investors," by UCLA law professor Lynn Stout is a good example of this.
In my opinion, the article was so wrongheaded that I am surprised that it was afforded an appearance in a premier business newspaper. I hope better academic guidance is provided for students in California than that exemplified in the editorial.
Let's consider a few of the comments in the WSJ article by Lynn Stout.
Ms. Stout states, "Shareholder activism can raise the stock price of a particular company, to benefit particular shareholders, in the short run. But it lowers the value of the stock market as a whole, for average investors, in the long run."
I can see no logical sense to any assertion that short-term gains in a particular stock lowers returns for the market as a whole over the long term. What research supports this claim? How can rising stock prices lower overall market returns?
Ms. Stout also suggests that activist investors are only interested in pushing for short-term stock gains after which they "dump" their stock. This is a common charge against activists leveled by faltering corporations and their enablers.
If Ms. Stout had bothered to take even a few minutes of her "busy" day to call me, I would have been happy to explain to her that I have many long term holdings, a fact that any competent first year law student could easily ascertain by a simple review of the public record. In fact my long term holdings have been responsible for the greater part of my net worth.
For example, this year we sold our Las Vegas casino properties, the majority of which we held for over 10 years, realizing a 270% return. I also realized gains of over 265% from the sale of National Energy and Panaco which I had held for over 10 years as well as Transtexas which I had held for over 7 years. Some longer term investments include Vector Group (since 1999), Blockbuster and Time Warner (both since 2004), and ImClone Systems (since 2002). I have owned ACF Industries LLC, a private company, for 24 years and Icahn Enterprises (formerly known as American Real Estate Partners) for 15 years, the stock of which has increased from $19.80 to $67.00 in the past 4 years.
My portfolio has held a great number of other long term holdings. Many stocks have gained in value since my initial investment and involvement – benefiting all stockholders.
Ms. Stout states, "…one favorite hedge fund tactic is to urge the outright sale of the company they have a position in, as Mr. Icahn did in the case of Yahoo. … while the shareholders of an acquired company typically receive a premium in a sale, the shareholders of the … acquirer often lose when the acquirer's stock declines."
This is a truly baffling claim. Is Ms. Stout saying that stockholders in a target company should be concerned about the stockholders in an acquiring company? It is true that stock-for-stock acquisitions sometimes cause the stock in an acquiring company to decline in the short term, but detailed analysis shows that it often rises with the increased revenue and profits as the new assets are incorporated.
But outside of that, Ms. Stout seems to argue against corporate acquisitions generally, because of the alleged debilitating impact it may have on acquiring companies. Someone might want to point out to her that mergers and acquisition activity is a well-established means for company growth and in many cases, positive for the economy.
In fact, it is often a good thing when a faltering company is acquired because those assets can be better utilized under new management. It’s not as if those assets are just thrown to the wolves.
Microsoft and Yahoo were discussing a combination long before my investment.
Ms. Stout states, "A second … hedge fund strategy is to demand massive dividend or share repurchase programs, temporarily raising share prices by draining "excess" cash out of a firm. This is exactly what Mr. Icahn got … at Time-Warner and Motorola. The result is often an anemic, over-leveraged company that lacks the funds to invest in long-term projects and that cannot weather economic downturns."
Wrong. This is not what happened at Motorola and Time Warner. To imply that these companies’ balance sheets are anemic and debt-strapped is simply not the case. I truly hope Ms. Stout reviews the facts and corrects this kind of distortion that is used to bolster her already weak arguments.
Motorola has approximately $7 billion in cash on its balance sheet. The company had a buyback program for 3 years before my involvement. Although I initially encouraged them to buy back additional stock in early 2007, I withdrew my recommendation after a March public disclosure that the company would miss forecasts. I began intently focusing on improving the cell phone business.
In the case of Time Warner, the company is now concentrated on their 'long- term project' of spinning off their cable unit –something I began pushing for when I first invested in the company. Time Warner could easily take on more debt and was more than receptive to the proposal in February, 2006. The company announced an accelerated buyback in February of 2006 under my recommendation and a year later the stock had increased by 18%.
In Kerr McGee, I encouraged a buyback program that improved the capital structure. The company was bought by Anadarko Petroleum in 2006. Investors who bought Kerr McGee stock on the same date I invested and profited from the acquisition by Anadarko realized an approximate 234% return. Since that time Anadarko has increased in value by 13%. Investors are not investing so that companies can hold excess cash on their balance sheet and accept money market returns.
Ms. Stout states, "…shareholder activism hurts average investors by making … managers more reluctant to operate as public companies. A common outcome … is to see the target company sold to a private equity firm. As a result, average public shareholders are finding fewer public companies … to invest in. This may explain why private equity funds able to snap up well-performing companies whose managers are tired of dealing with activists …."
Private equity funds make money because they buy mismanaged public companies and run them like the owners they are, many times ridding the company of the bureaucratic, self perpetuating board. True corporate democracy should produce the same results for public companies; and thus the maximum value for public shareholders. If every public company was managed to its full potential there would be no room in the marketplace for private equity financial buyers. The reason my investments succeed is because I take the time to put the right managers at our companies, replacing inept bureaucrats who place the blame for their failures on others.
The thing shareholders are fighting for (and, incidentally, the best thing for the corporations) is to replace bureaucratic systems with the control that owners will bring to the business in an effort to maximize value. So here we are today. Unaccountable CEOs and boards must go. And it is the responsibility of every shareholder to demand it.
For our companies to be competitive they must be held accountable and pay better attention to shareholders: the owners. This nation is losing its economic hegemony because assets are mismanaged and not utilized to their maximum value.
It is a sad fact that many of the professionals that consider the influence of activist investors seem to adopt the views of PR firms which are paid by corporations with shareholder dollars to mislead and obfuscate the truth. Addressing the real problems facing corporate America will require a thorough understanding of the relevant business dynamics and cannot be solved by fingerpointing or hyperbole.
These issues are far too important for so many journalists and academics, such as Ms. Stout, to continue to confuse public perception. The stakes are extremely high; ineffective and incompetent managements are thwarting the ability of our nation’s businesses to compete globally, leaving too many companies sliding down our current slippery economic slope.