Sometimes profane and frequently combative, Carl Icahn long ago established he has no strong desire to be loved. But he seems intent on demanding a bit of respect — both for himself and his life’s work of activist investing.
As his publicly traded investment vehicle Icahn Enterprises LP (IEP) reported strong quarterly results Monday, thanks mostly to his investing profits, Icahn offered a vigorous defense of his high-pressure approach to forcing corporate action for the benefit of today’s shareholders.
In a press release statement (which Icahn flagged to his Twitter followers as being “of interest to all shareholders), Icahn asserted, “I believe that by far the best method to utilize in investing is the ‘Activist’ model. I have spent a great deal of time and effort perfecting its use and I am happy to say that IEP has been a beneficiary of this.”
This is true: Icahn Enterprises partnership shares (which represent ownership in some Icahn investment funds and a few wholly owned energy and industrial businesses) gained 39% annualized from near the bear-market lows of April 1, 2009, through Oct. 31. Since 2000, the investment has appreciated some 1,500%.
The "ideal" moment for the activist approach?
Moving on from taking credit for having perfected the art and science of financial arm-twisting, Icahn goes on to detail why he sees the current market moment as nearly ideal for the activist approach.
Extremely low interest rates, he observes, make debt cheaper than it’s been in memory, so it's easy to finance acquisitions – usually the implicit or explicit threat used by activists.
Striking a strident, populist tone, Icahn cites “the current awareness by many institutional investors that the prevalence of mediocre top management and non-caring boards at many of America’s companies must be dealt with if we are ever going to end high unemployment and be able to compete in world markets.
“I believe that the greatly increasing need for a catalyst to make acquisitions possible and to make mediocre managements accountable will be of meaningful benefit to IEP in future years. As a corollary, I expect that low interest rates will greatly increase the ability of the companies IEP controls to make judicious, friendly or not so friendly, acquisitions.”
This public-spirited, if belligerent, tone reflects activists’ perpetual effort to insist they wear white rather than black hats, and comes after Pimco Asset Management co-founder Bill Gross last month started a Twitter skirmish by saying Icahn should “leave Apple alone & spend more time like Bill Gates. If #Icahn’s so smart, use it to help people not yourself.”
Gross refers to Icahn’s somewhat gentle campaign to persuade Apple Inc. (AAPL) CEO Tim Cook to buy back dramatically more shares to shuttle its cash stores to shareholders, which came near the time Icahn sold a big portion of his Netflix Inc. (NFLX) stock at a huge profit. Icahn then publicly detailed a bet with his son and lieutenant Brett Icahn, who preferred not to sell any Netflix – arguably an unseemly display of billionaire gamesmanship.
Interestingly, neither of these positions reflects a quintessential Icahn activist attack on a shiftless or value-suppressing management team, but rather were skillful value-based buys of great companies.
The more academic argument against the activist modus operandi is that it simply rewards short-term investors who often wish to sell the stock for a quick gain, rather than benefiting long-term holders with strategic investments in the business. With some legitimacy, activists are likened to “greenmailers,” who publicly threaten hostile action and demand to be paid to go away.
A ripe environment for the activist
It’s hard to deny the environment now is ripe for continued heavy activist action. Aside from cheap capital readily available, organic revenue growth is hard to find for many big companies, and stock valuations have generally grown to reflect strong profit margins and balance sheets. This leaves financial engineering – spinoffs, buybacks, recapitalizations, mergers – as one of the few ready levers to pull.
A few weeks ago here, a handful of companies – Janus Capital Group (JNS), American Eagle Outfitters (AEO), Corning Inc. (GLW) and K12 Inc.(LRN) – was cited as, on paper, potential activist targets based on cash richness, modest valuation, subpar share performance and/or strategic drift. While there is no evidence Icahn or any other buccaneer is targeting these companies (and, as later noted, Corning Inc. has in a sense gone activist on itself), they still fit the profile.
With a predictable gesture of confidence, Icahn concludes, "While I am very proud of IEP’s record over the past decade, I believe this record will pale in comparison to what is yet to come.”
A professional raider such as Icahn might always see the world as possible prey, much as the barber will always say you could use a trim. Yet just now he's probably right that there's plenty of dry tinder sitting around in Corporate America for activist sparks to light.