Wall Street Profiles: Carl Icahn

In this third installment of my recurring series on famous Wall Street investors (I have previously written about Jim Simons of Renaissance Technologies and Bill Miller of Legg Mason Value Trust), I profile Carl Icahn, well-known as one of the original corporate raiders. His aggressive style has been re-branded as activist investing in recent years, but corporate executives fear him now just as they did 35 years ago.

Biography and Early Life

Carl Icahn was born in 1936 and raised in New York City (Queens) by his parents, both teachers. He attended Princeton University for undergrad and then went to New York University for medical school, but never finished. After a brief stint in the military, he started his Wall Street career in 1961 and formed his own company, Icahn & Company, in 1968. He has had a long and illustrious career, becoming a billionaire because of his shrewd investments.

With his vast wealth, he has given extensively to his alma mater, Princeton University, where a genomics laboratory is named after him. He has also given generously to the Mount Sinai School of Medicine, which is now officially called the Icahn School of Medicine at Mount Sinai. His net worth, according to Forbes, was $15.9 billion dollars in April 2017.

Key Trades

Trans World Airlines

In 1985, Icahn was able to acquire a controlling stake in Trans World Airlines. The company had a great brand name, but was struggling financially. Over the next 10-15 years, under the premise of turning around the company, he systematically stripped the company of its assets through a series of deals that lead to a huge profit on his investment. Unfortunately for TWA, after three bankruptcies, the company was sold to American Airlines in 2001. Through his TWA investment, Icahn burnished his legend as a corporate raider. He became hated by corporate executives and beloved by investors.

RJR Nabisco

In 1995, Icahn set his sights on RJR Nabisco. He accumulated over 19 million shares of the company, which was a conglomerate of RJR (Reynolds, the tobacco company), and Nabisco (maker of Oreos and other tasty treats). Once he gained the large stake in the company, he lobbied RJR Nabsico’s executives to spin-off Nabisco, given the large legal issues that surrounded the tobacco industry at the time. While he was initially unsuccessful in his lobbying efforts, he was able to liquidate his position in 1997 for a $125 million profit.

But this was not the end of the story. In 1999, RJR Nabisco decided to spin off the Nabisco brand, and Icahn jumped into the bidding war for Nabsico. Eventually Nabsico was sold to Kraft Foods, with Icahn reportedly earning a $600 million profit.

Apple

In 2013, he brought his activist investing style to Apple, tweeting that he had acquired a large stake in the company. Everyone knew that Apple was sitting on billions of dollars in cash reserves, and Icahn publicly asked Apple CEO Tim Cook to buy back $150 billion worth of shares to boost the stock price. While not getting the full $150 billion, Apple repurchased 760 million shares worth $87.2 billion dollars from September 2013 to December 2015. By April 2016, Icahn reportedly had sold all of his Apple shares, making a $2 billion profit.

Takeaways

Icahn makes “active” mutual funds look passive

Even “actively-managed” mutual funds are very passive compared to Carl Icahn’s investing style. Mutual funds usually allow current management to do their jobs running the company. Their investment is an implicit endorsement that the company can deliver profits for the shareholders (including the mutual fund). However, in recent years, some activist investors have been working with big mutual funds to help get enough backing for their ideas.

Carl Icahn earns his investment returns through activist investing

Carl Icahn is not passive like other mutual funds. We saw that when he takes positions, he lobbies aggressively for current management to make changes that benefit himself and other shareholders. When the executives disagree with Icahn, he tries to have them replaced.

Icahn creates his own returns through corporate raider / activist investing techniques. He does not wait for big returns; he creates them.

Activist investing cannot be done by individual investors

If you are very wealthy, you could buy into activist investors’ funds directly, but they are typically hedge funds, with the typical cost structure of 2% of assets under management and 20% of profits. Most doctors will not have the money to directly invest into these hedge funds.

People try to ride Icahn’s coattails, with mixed success

One strategy people try is to copy Icahn’s and other activist investors’ trades. Activist investors will often make very public presentations explaining why they believe a company is mismanaged and how their changes can better serve shareholders.

Unfortunately, other people have caught onto this, and markets will move when these presentations occur. The markets move fast, and most ordinary investors cannot react quickly enough to profit. Like Donald Trump, Carl Icahn tweets and moves markets.

There are some new ETFs that try to replicate top activists’ holdings by using the 13F filings that hedge funds must report to the Securities and Exchange Commission (SEC) on a quarterly basis. Unfortunately, they must be submitted within 45 days of the end of the quarter, which is a lifetime in the world of trading. Also, 13F filings do not include short positions, which many activist investors use to make money.

As a result, these ETFs have gained very little traction and are very thinly traded. It is not so easy to mimic Carl Icahn.

Further Reading

1. Wikipedia’s profile of Carl Icahn
2. Carl Icahn was also profiled by Investopedia
3. A detailed history of Carl Icahn and the TWA trade by St. Louis Magazine
4. CNN’s timeline of Carl Icahn’s life

What do you think? Do you think activist investors such as Carl Icahn can make above-market returns? Is there any way that an ordinary investor can replicate their success?