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Response to WSJ Opinion Piece 'Why Carl Icahn Is Bad for Investors'

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.

Comments

Let them know what time it is Mr. Icahn. We have these young bucks coming in having no understanding of the game. Ms Stout...get all thy knowledge, but with all thy getting get understanding.



I am surprised that Mr. Icahn actually spent so much time in crafting a response to an article that is neither well researched nor backed up with factual information.

Though one must wonder, how many people out there read that article? And how many of those people actually believe the rhetoric that is been thrown around by Ms. Stout? And finally, how many people have been misled?



Amusing.

Rational readers already ignore people such as Ms Stout. Academics have an incentive to attract publicity. They are paid on the basis of the reach of their voice.

Your post will perhaps add value to the small segment of the population who choose to think for themselves, yet lack the capacity to reach their own conclusions.

However, I would caution you against unequivocally defending all activist investors and private equity professionals. For each idealist, there are several speculative charlatans. Whereas a few of us might envision a world where rational decisions are made, I'm sure you can name a few well-backed individuals who are incapable of the conclusion "A, therefore A". The chumps might not be far off in declaiming the average "investor" as a destructive force.

In speaking for an asset class, you fall into playing their game. As we know, it's not the sector nor the company that generate value - it's the individuals behind the actions. Defend yourself, Einhorn, and others who're highlighted by the chumps. Statements such as "shareholders are fighting for...", and "private equity funds make money..." are easily taken apart with specific examples to the contrary.

Overall, I applaud your effort. Closet rationality gets us nowhere.



It seems to me that Ms. Stout has watched Wall Street one too many times & feels she can classify all activist investors under the Gordon Gecko heading.



"Unaccountable CEOs and boards must go. And it is the responsibility of every shareholder to demand it." And its not just public companies.
Public AND private companies are full of unaccountable CEOs and boards.Trust me the ineptitude within private companies and the abuse of minority shareholders is just as common.
The fast majority of activist deals and private equity deals bring a new level of accountability and effectiveness that should be applauded. As pointed out, institutional financial buyers can, and do get it wrong, usually when greed and ego cloud the judgement, however the case was poorly made against Mr Icahn. Ms Stout could have chosen easier targets to make her case.



I have different views to those of Ms Stout.



Good response to the article. Greenspan comments in his book "Age of Turbulence" something to the effect of CEO's generally being the wrong people to run companies. CEO's are often people who try to appease everyone and therefore they end up being the most likable people, not necessarily the best people to run a business. Often the best of the company do not become CEO's and are hired on elsewhere or stay just below the radar because they are willing to make decisions everyone will not like.

I have seen many incompetent boards over the years, particularly at small companies which have a technology or an advantage over other companies, but do not have the skills to manage the company. As a little person in the investment world it is difficult and frustrating when a board does not perform and the company's technology or idea flounders. The small fish often have no ability to fight back and there are times where boards have obviously not performed, with no ability for the small investor to make a difference.

Large investors like Mr. Icahn can make a difference and without such people the boards could get away with much more lackadaisical performance. The alternative to active shareholder involvement in a company is increased government oversight and regulation. This is something most investors would disdain automatically. Sarbanes-Oxley, for example, was a result of incompetent boards being called out by whistle blowers in mass during a short period of time. As a result the government hastily (one could say) prepared a piece of regulation which has been costly to companies and therefore long term shareholder value. Additionally, Mr. Icahn is spending his time and his money to fight these battles, not tax payer money to oversee the companies.

For free markets to exist, there must be confidence in the continuation and reliability of the markets and the information available to those involved in the market. The market will regulate itself, to an extent, weeding out the bad seeds over the good. The faster the market has dealt with the bad, the faster the market can accurately price an investment and move on to better things.

Thank you Mr. Icahn.



Mr. Carl Icahn ,
I enjoy, trust, and respect The Icahn Report ! Most American Citizens know these law professors ( Lynn Stout )at almost all Universities, really do their profession a real injustice.
I just retired from THE POULTRY INDUSTRY ! I found that most Poultry BS, MS , knew as much about poultry, as I assume "Lynn Stout" knows about investing. Keep the great work up Carl !



Excellent article - poignant and informative.!



Obviously, Carl is doing something right! No need to belabor the point. His record and scintillating achievements speak for themselves. That is why Lynn Stout is where she is and Carl Icahn is where he is. I would infinitely prefer the position of the latter!



There is a lot of yes people and mobs leading companies within company so there is the need to say enough is enough!



Stout is presumably a tenured professor, thereby immune to the market forces that everyone in the private sector - from McDonalds workers to Icahn - not only lives with, but thrives upon.

There is an argument that as long as such people exist, they should be encouraged to become professors and write silly articles for the popular press. The alternative is for them to become CEOs, whereupon they start feathering their own nests to insulate themselves from the market.



I have similar views to those of Ms. Stout.



Lynn Stout's article had two fatal flaws:

1) Rationalism: Working from a "model" rather than trying to look at the real world. (As proof, see her fallacious claims about short-term holdings and dividends.) Too many academics do this: like the proponents of EMT and various other pet theories.

2) Altruism: Thinking that investors should worry about something other than getting the best deal for themselves (as long as they are not stealing). As proof, see her notion that one should not make one company too good, because it might hurt the competition; or, see her notion that a tough negotiation is wrong!

This is not the type of academic I want, teaching my kid how to compete with the Chinese!



Mr. Icahn,

I thoroughly enjoyed reading your response to the critical article by Prof. Stout. Your personal insights into the returns you have reaped & the deals you have made during your career were particularly interesting.

My comment is on something more fundamental to this situation: why is a law professor commenting, with authority, on sound investment practices? In the WSJ, no less? Prof. Stout has an economics background from Princeton & a law degree from Yale. While she is without a doubt an educated & presumably very intelligent woman, her professional training clearly leans on case study & game theory, not business application.

Prof. Stout obviously has studied the results of many business deals over the years; but that she presumes to understand their underlying causes is pompous, even a bit silly.



You're comment about corporate acquisitions is not entirely correct. Part of my thesis in finance revolved around mergers and acquisitions and the question of whether or not they created share holder value. And for a 20 year period, the majority of the firms who were the acquirers (buyers) had very short term gains, but in the long term the gains from M&A were flat or negative in many cases. I will agree that getting bought out is of course usually positive for the target firm. I would also agree that this is a fine investing/ hedge fund strategy because of the arbitrage possibility, but from the stand point of corporate takeovers, more times than not the acquiring company does not make its money back from the premium.



I think Ms.Stout is hanging around Cramer to much!



Great post, really enjoyed hearing somebody speak some truth about the article by Ms. Stout.



Stout is an Academic. Not a practitioner. So, her opinion should be discounted at a much higher rate than that of someone who is actually in the business doing deals every day. Academics make me laugh.



Ms. Stout makes some comments that are just plain silly. She seems to believe that shareholder activism leads to public companies going private reducing the number of stocks we can invest. The last time I looked, the problem for most investors wasn't the lack of options, it was the overwhelming number of choices available.

On the other hand, there is evidence to suggest takeovers often don't produce the intended results the acquirer was hoping for. In this regard, she is right to question M&A work.



sounds compelling....
would you care to tell us more about how you pick the stocks. for example, why did you pick Las Vegas casino and why did you chose to drop it again?

thank you



I am not a fan of all of your deals, but on balance I think your influence(if not that of all activists) is positive. Mrs. Stout's motives-increased attention and influence-are so transparent they don't deserve further mention. I also agree that historians will look back and wonder at the extreme lack of responsibility/accountability that should(but doesn't) come with high positions in corporate America.



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