How To Invest Like Carl Icahn

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The leveraged buyout was one of the great financial inventions of the 1980s. Buying companies with little money down and stuffing them with debt before exiting with a massive gain turned millionaires into billionaires and forever changed the rules on the Street.

Without the leveraged buyout, Carl Icahn would have never earned a reputation as one of the all-time great corporate raiders. Icahn, also a high-profile shareholder activist, has parlayed a highly disruptive and contrarian investment style to build a net worth over $20 billion, making him the 36th richest person in the world.

Carl Icahn's Biography
Carl Icahn was raised in the New York borough of Queens by two schoolteachers. That focus on academics rubbed off on Icahn, who graduated from Princeton University in 1957 with a degree in philosophy. After a four-year stint split between medical school and the U.S. Army, Icahn landed his first job on Wall Street in 1961 as a stockbroker. But it didn't take long for Icahn to grow restless, buying a seat of the New York Stock Exchange and launching his own securities firm, Icahn & Co., in 1968 and specializing in options brokerage.

Driven by the success of his first business venture, Icahn had begun buying entire companies by 1978. That placed him in the perfect position to cash in on the huge leveraged buyout craze of the 1980s, when he began to earn his reputation as a ruthless corporate raider. Icahn is considered a pioneer in sharply increasing the leverage ratios of an acquired to increase cash flow before exiting with a big profit.

Today, Icahn is the chairman of Icahn Enterprises (IEP), a diversified holding company that owns businesses in a number of different sectors, including energy, transports and financial services. Icahn is also the chairman of biopharmaceutical company ImClone and auto parts supplier Federal-Mogul.

Carl Icahn's Investment Strategy
At his core, Icahn is a contrarian and value investor, focusing on companies that have fallen out of favor with the public and are trading deep into value territory. But his approach is what sets him apart from the competition. Much like Warren Buffet, Icahn likes to take big positions in his favorite companies, which gives him controlling interest as one of the largest shareholders. That controlling interest is key to fueling the second half of Icahn's investment strategy.

Controlling interest usually involves appointments on the board, which Icahn then uses as a platform to disrupt the status quo, make management uncomfortable, rally shareholder support and launch major turnaround strategies. Icahn is notorious for affecting change and getting top executives and board members tossed out of companies under waves of public and shareholder scrutiny. Once the turnaround strategy is in place and sentiment shifts, Icahn the corporate agitator is in place to reap huge gains on positions he initiated when optimism was low. Icahn has perfected this tried and true formula, which has led to billions of dollars in profits.

     
 

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  Icahn has parlayed a disruptive and contrarian investment style to build a net worth over $20 billion, making him the world's 36th richest person.  

Carl Icahn's Big Wins
Icahn got his first taste of the kind of quick returns a leveraged activist buyout can produce in 1979 when he won a proxy vote to takeover Tappan Co. Icahn then proceeded to give himself a seat on the board and orchestrate the sale of the company, which quickly doubled his original investment.

Icahn's reputation as a ruthless corporate raider was born in 1985 after his hostile takeover of TWA, a struggling airline company. Icahn was able to extract close to a $1 billion profit from the deal with little capital. After executing a hostile takeover and selling TWA assets to pay back the loans he used to buy the company in the first place, Icahn then took TWA private in 1988 for a profit of more than $465 million in less than three years. Three years later, Icahn sold TWA's lucrative London routes to American Airlines for $445 million.

Since then, Icahn has used his trusted formula to score some of the biggest and most impressive wins in the industry. Just last year Icahn was up to his old tricks again, building a large position in Chesapeake Energy (CHK), having its longtime CEO removed and supporting asset sales to ease concerns about liquidity. The formula has produced another huge winner for Icahn, with Chesapeake's 50% gain in 2013 lifting the value of his stake to $1.2 billion.

Carl Icahn's Portfolio: What's He Holding Now?
Icahn's strategy of taking big positions in his favorite ideas shows up in his current portfolio. The largest holding in his $17 billion hedge fund is Icahn Enterprises at 34%. CVR Energy (CVI) is close behind at 16%, while Chesapeake clocks in with a 6% allocation. Icahn also carries a $1 billion allocation to Netflix (NFLX) that he initiated in December after shares had fallen from an all-time high approaching $300 to less than $100.

Icahn's Top 10 Holdings

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Action to Take --> Carl Icahn's investment strategy is driven by taking big positions in stocks and companies that have temporarily fallen out of favor with investors, capitalizing on a short-term drop in sentiment that has shares trading below their real value. And even though regular investors don't have the financial ability to agitate for change at the executive level, every holder of common stock has voting rights that help shape company decisions and executive compensation.

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