Michael Santoli

Can Investors Win By Following Icahn Into Battle?

Michael Santoli

It’s obvious that Carl Icahn can make himself be heard. But can he make the average investor any money?

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Icahn, the billionaire activist investor, has been unusually active and vocal lately. Beginning last October with the disclosure of a nearly 10% position in Netflix Inc. (NFLX), the 77-year-old investor has focused his opportunistic agitation on several high-profile situations.

Since then, Icahn has built a 15.5% stake in Herbalife Ltd. (HLF), an apparent score-settling gesture with outspoken Herbalife bear William Ackman of Pershing Square Capital. This feud famously took to the airwaves during a live insult-trading episode on CNBC. In recent weeks, Icahn has also rattled the CEO suite at energy-services giant Transocean Ltd. (RIG) and barged into the cozy plan for Michael Dell and Silver Lake partners to take Dell Inc. (DELL) private.

Icahn’s typical mode of operation is to build an ownership interest in a stock, and then either contact management about his ideas for unlocking value or file a so-called 13D with the Securities and Exchange Commission; this serves as public notice that an investor has taken at least a 5% position and intends to influence company management.

Verdict is out

The verdict is out on whether Icahn’s newly opened positions will break in Icahn’s favor. Netflix shares have surged to above $180 from the $83 level they traded at when Icahn divulged his interest last year, though no changes pushed by Icahn are behind the move. Rather, Netflix’s success in streaming original video programming and its agreement to distribute Walt Disney content beginning in a couple of years got investors excited.

Herbalife shares have slightly outperformed the market since he reported his big bet on the multi-level marketer of nutritional aids, and Transocean stock has sunk a bit since Icahn increased his stake back in January.

Icahn these days wields his own money; in 2011 he returned all outside investor money in a hedge fund he ran. He presides over a publicly traded limited partnership, Icahn Enterprises LP (IEP). It is closely held, with Icahn himself owning around 90% of the shares, and the stock is thinly traded. The company holds several operating businesses aside from an investment portfolio, and the stock only an indirect play on Icahn’s headline-generating activist campaigns.

A full accounting of Icahn’s public activist efforts, though, suggests that following Icahn into a stock once he has taken and filed a stake in a company would have produced market-beating returns over the years, though by no means is he immune to pressing big losing bets.

Tracking the returns

Ken Squire is founder and principal of 13D Monitor, a research service that tracks activist investing and has data on Icahn-led activist situations since 1994, when the investor targeted Samsonite Corp. The average return of the 85 positions since then was 18.7% (measured until he closed the position, if at all), compared to 12.7% for the Standard & Poor’s 500 over comparable time frames.

Yet this impressive-seeming average outperformance should be viewed in the context of a general tendency of stocks to outperform once they have attracted the intense interest of known activist investors. In other words, this doesn't apply to Icahn alone.

Squire calculates that, following a 13D filing, the shares of companies larger than $1 billion in market value have historically outperformed the S&P 500 by an average of 16 percentage points over the subsequent 15 months. A separate study of nearly 300 activist actions by hedge funds between April 2006 and September 2012 found a similarly strong record of success. Squire runs the relatively new (and so-far small) 13D Activist mutual fund (DDDAX), which chooses stocks from among ongoing activist situations and beat the S&P 500 by 5.27% in 2012, after fees.

Squire takes into account the past record of specific activist investors when considering fund holdings. Hedge fund JANA Partners, for example, has a strong success rate in its arm-twisting maneuvers on corporate executives it deems lacking. One of its prominent targets currently is Canadian fertilizer giant Agrium Inc. (AGU).

Mixed results

Icahn’s overall investment results – derived from all sorts of investing activities beyond the disclosed activist positions – have diverged widely from that average over various time periods. He earned an average of 53% a year on his capital from 1996 through May 2004, according to a Bloomberg report citing offering documents for his hedge funds. The results of his hedge funds were weaker, around 11% a year from late 2004 through 2010. He attempted to catch a few proverbial falling knives in the years surrounding the financial crisis, including busts such as Dynegy and WCI Communities.

The most attention-getting names among Icahn’s recently initiated investments don’t fit neatly into the typical mold of an activist target, often a mismanaged company or one plagued by management unmotivated to seek a better value for shareholders.

In Herbalife, Icahn simply calls the stock a good value after Ackman’s public bearish takedown of the company as a possible pyramid scheme sent the shares from the mid-$40s to below $30 in December. As for Dell, Icahn joins some more traditional value investors in claiming the deal for Michael Dell and Silver Lake to acquire it for $13.65 a share undervalues the company, proposing instead a $9-per-share special dividend. He has now inked a confidentiality agreement to look at Dell’s books.

Dell shares are already trading above $14, implying the market spies upside to the deal price one way or another. Yet the stock traded near $10 prior to the buyout offer, so it’s unclear whether the market would bestow much value on Dell’s computer business atop any extraordinary cash dividend shareholders might pry from its balance sheet.

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