Carl Icahn’s Investing Strategy



Carl Icahn is one of Wall Street’s most successful figures. In the 1980s, this corporate raider—using Drexel Burnham’s junk bonds—became known as a vulture capitalist, taking positions in public companies and initially demanding extreme changes in both their corporate leadership and management styles. Often, targets paid him “greenmail” money, with the stipulation that he would step away from his target.

By the end of the 20th century, though, his reputation changed, as he became a shareholder activist. Investors followed his lead and bought into the businesses he set his focus upon. The increase in stock price caused by the anticipation that Icahn would uncover shareholder value became known as the “Icahn lift.”

Investment Philosophy

Icahn has said, “My investment philosophy, generally, with exceptions, is to buy something when no one wants it.” More specifically, as a contrarian investor, he identifies stocks with low price-to-earnings (P/E) ratios or with book values that exceed the current market valuation.

Icahn then aggressively purchases a significant position in the corporation and either calls for the election of an entirely new board of directors or the divestiture of assets in order to deliver more value to shareholders. Icahn focuses publicly on CEO compensation, arguing that many top executives are grossly overpaid and that their pay is not commensurate with shareholder returns.

Beginnings

Icahn’s first victory came in 1979 at the Tappan Company. Soon after winning a seat on the board, he engineered the sale of the kitchen stove maker in a transaction that earned him $3 million. Soon after, he would target Marshall Fields and Phillips Petroleum, which yielded significant returns as the companies fought to stave off a takeover.

TWA was the pinnacle of Icahn’s early endeavors. In 1985, he took over the airline once controlled by Howard Hughes. Soon after, TWA bought several small regional carriers, as Icahn sought to use the airline’s expanded scale to increase its profitability. In 1988, he took the company private through a $650 million stock-buyback plan that allowed him to regain almost his entire $469 million investment. This also saddled TWA with $540 million in debt. Soon after, the airline’s most prized routes would be sold to competitors, leading the weakened business to declare Chapter 11 in 1992. Icahn left the company the next year.

In the interim, Icahn negotiated for airline vouchers from the company in lieu of the $190 million that TWA owed him. Because the deal included the provision that he could not sell these tickets through travel agents, Icahn founded LowestFare.com to sell them.

Reflections on the TWA Experience

Icahn’s experience with TWA would lead him to focus primarily increasing the share price of his investments by forcing the divestiture of the companies’ undervalued assets. An alternative outcome was the direct payment of greenmail to Icahn.

Typically Icahn would buy a large block of shares in the corporation, then nominate his own a slate of directors for election at the company’s annual meeting.

Icahn used this tactic to force USX—the corporate descendant of Andrew Carnegie’s U.S. Steel—to spin off its steelmaking operations and to focus on the petroleum business through Marathon Oil. In 1991, following the creation of a second class of USX shares to track the steel business, both share classes gained 28%.

Icahn also got involved in the battle between Pennzoil and Texaco over Getty Oil. He accumulated more than 13% of Texaco’s stock but failed in his effort to take control of the board. He profited when resolution of the dispute lifted Texaco’s share price, bringing Icahn a financial windfall.

More Recent Successes

In another famous corporate raid, Icahn accumulated a 7.3% stake in RJR Nabisco during the late 1990s. He then launched a proxy fight to gain control of the board and force the breakup of the company. Even though Icahn was unsuccessful in these efforts, the raid produced a $100 million gain for his portfolio.

In a similar vein, Icahn tried unsuccessfully to force Time Warner to split its operations into four separately listed companies in 2006. Though rebuffed by the other major shareholders, Icahn got Time Warner to elect two independent board members and commit to cost-cutting measures, reaping another large gain in the process.

In the autumn of 2012 Icahn targeted Netflix Inc. (NFLX). True to his contrarian philosophy, he accumulated a stake of more than 10% of the company when Netflix stock was near a 52-week low. The “Icahn lift” sent the share price soaring 14% after he disclosed in a regulatory filing his stake in the company. Netflix board responded by adopting a poison pill. By the time he exited the position in 2015, Icahn had made more than $1.9 billion on his initial $321 million investment.

Icahn’s Beef With McDonald’s

In February 2022, Icahn nominated two directors for election to the board of McDonald’s (MCD) at the giant fast food chain’s 2022 annual meeting. Though he reported owning just 200 shares of McDonald’s stock, Icahn had been involved for a decade in an effort to stop McDonald’s from sourcing pork from suppliers using gestation crates, which limit the movements of pregnant sows, at the behest of a daughter who’s worked at the Humane Society.

McDonald’s responded by saying Icahn has pressed it for new commitments requiring all pork suppliers to the company to abandon crates within specified timelines. That demand “reflects a departure from the veterinary science used for large-scale production throughout the industry, and would harm the Company’s shared pursuit of providing customers with high quality products at accessible prices,” McDonald’s said.

In April 2022, Icahn accused the company of “failing to deliver on [its] commitment to eliminate usage of cruel gestation crates in its supply chain,” and called on McDonald’s shareholders, “particularly large asset managers focused on ESG,” to back his nominees to the company’s board. ESG stands for environmental, social, and governance, the alternative policy benchmarks used by socially conscious investors to allocate investment funds.

On April 22, 2022, the Humane Society filed a complaint with the U.S. Securities and Exchange Commission (SEC) echoing Icahn’s arguments and alleging McDonald’s had misstated in past securities filings its commitment to discouraging gestation crates.

The Bottom Line

Descriptions of Carl Icahn range from vulture capitalist to greenmailer. He’s been called a gadfly and a shareholder activist. In fact, neither his philosophy nor his strategy has changed much over the decades as he rose from stockbroker to one of Wall Street’s most influential players.

Investors such as T. Boone Pickens and Saul Steinberg have employed similar hardball tactics in their battles with the boards of undervalued public corporations. However, Icahn’s war chest has grown not only from the accumulation of the gains from past deals but also thanks to his creation of Icahn Enterprises L.P., a large master limited partnership. This investment vehicle provides Icahn with capital supplementing his enormous personal fortune for use in strategic investments and shareholder activism.



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