THE NETFLIX DEAL: On October 31, 2012,
Carl Icahn announced that he had purchased a 10% stake in Netflix. This was really a
Halloween spook for Netflix as Icahn was somone that you didn’t want anywhere near your company.
People like Icahn constantly assure you that oh it’s just a passive investment, I’m not trying to
takeover the company, and then boom you get sued for depicting Cleopatra as Black. Wait nevermind,
wrong result. Boom, Icahn shows up with enough money to buy you out cash. Back in 2012, this
wasn’t even that hard as Netflix was only worth $4 to $5 billion which was nothing for Carl Icahn. He
had orchestrated $8 billion buyouts way back in the 80s, so $4 billion in 2012 was childs play.
With a net worth of $21 billion, he could literally buy out Netflix with a
personal loan and that was probably what he was planning on doing despite his hollow promises.
Netflix’s executive team would scramble trying to find a way to fend off this bully, and they would
end up implementing a defense called the poison pill. The poison pill was somewhat effective but
it was by no means a full proof plan. All Netflix could do though was nervously wait and hope that
they don’t hear about another purchase. But, weeks went by, months went by, and a full years went
buy. No new purchases. In fact, Icahn would even go ahead sell off his entire stake by mid 2015.
Had the poison pill really worked? Had Netflix just fended off the infamous Carl Icahn? No way
Icahn was actually being honest about his passive intentions right? Well,
probably not and I don’t think he was put off by the poison pill either. The reality is that Icahn
had lost his mojo. While his net worth had gone up over the years, his days in power toying with
fortune 10 companies were long gone. It wasn’t just Icahn who was in this situation. Corporate
raiders as a whole had lost their power. Back in the day, these guys were the worst nightmare
of small companies and their shareholders. With financing from Wall Street, raiders would march
into random companies where they were not welcome and buyout a large portion of the company if not
the entire company. After that, they would go onto fire large portions of the workforce, increase
efficiency no matter the cost, and bolster the stock price through any means possible.
Once the company has been milked, raiders will happily sell off the remaining pulp of the company
to some random sucker before moving onto to their next victim. This was the brash and ruthless job
of a corporate raider. But while this was no doubt a nasty job, it was also lucrative. Till recently,
Icahn was worth over $20 billion. But, today, he’s fighting against accusations that he’s been
running a Ponzi which has crushed his net worth down to just under $8 billion. So, here’s the
insane story of how Icahn went from playing with Fortune 10 companies to being accused of fraud.
CARL ICAHN:
Taking a look back, corporate raiding doesn’t have an extensive history like stock buybacks or dual
class stock. It rose in popularity during an era and then disappeared shortly after. There were a
few instances of corporate raiding throughout the late 1960s, but corporate raiding didn’t really
become a thing until Carl Icahn. Icahn started off as nothing more than an average kid born
in 1946 to a Jewish family in Brooklyn New York. His family was squarely in the middle class with
both of Icahn’s parents being school teachers. But this didn’t hold him back from getting into
Princeton University and graduating with a degree in philosophy in 1957. At first, it seems that he
wanted to be a doctor as he would enroll in the NYU School of Medicine but he would end
up dropping out and joining the military reserve forces. He would follow this up with a traditional
job on Wall Street as a stock broker in 1961. He would learn the ins and outs of stocks, options,
bonds, warrants, and other financial products over the next 7 years before opening his own
company called Icahn & Co in 1968. From the very beginning, Icahn was especially interested in
leveraging market inefficiencies but he was by no means buying out entire companies. Rather his
company was focused on something called arbitrage trading. This is basically when you make money by
leveraging discrepancies in market pricing between different markets and exchanges. For example,
Tesla stock might be worth $100 on TD Ameritrade but might be worth $101 on Robinhood. In this
case, it would make sense to buy Tesla stock on TD and then instantly sell the stake on Robinhood.
You would only be making $1 per share but if you did it with 100,000 shares, well now you’re making
serious money. That’s just an example though as it’s not nearly that easy. Such blatant pricing
discrepancies are extremely rare. You’d be lucky to find a 5 or 10 cent discrepancy on popular
stocks. But, you’ll have a much better chance if you look deeper than just common stock. For
example, you could look at the debt market. Many companies issue bonds that can be converted to
stock at a set ratio. So, theoretically, you could buy a Tesla convertible bond and convert
it into 10 shares of Tesla stock. If your all in cost for the bond is less than the current price
of 10 Tesla shares, well then, you’re golden. You can just sell the 10 shares and make money. This
is precisely how Icahn made his initial money. He was constantly looking for discrepancies between
options, preferred stock, common stock, bonds, warrants, and mutual funds and he
was constantly converting between these assets to generate a profit. Many people aren’t big fans of
market arbitrage as they see people like Icahn as bottom feeders. They basically scrape by and make
a living without adding any real value to the world. The argument against this would be that
arbitrageurs make markets more efficient. But, I don’t think Icahn was concerned about justifying
his means to anyone as it wasn’t long until he jumped into something much more controversial.
A NEW PRACTICE:
Much of the popularity of corporate raiding can be explained by the economic
environment throughout the 70s and 80s. Interest rates were extraordinarily high at up to 19%. At
first glance, this might sound like a great thing as you could just store away cash in
a savings account and earn Warren Buffett level returns until you consider inflation. Inflation
also reached up to 15% so rarely were you making any sort of real return. This didn’t just apply to
savings accounts either. Whether you were looking at real estate or stocks or gold or index funds,
chances were high that there was no real return. This made investors especially desperate and risk
tolerant. They were willing to do just about anything including piling into junk bonds.
In fact, between 1979 and 1989 the junk bond market exploded from $10 billion to $189 billion.
But, our man Icahn had a much better pitch for investors. Given that people were shying away
from stocks, the market had stagnated for about 10 years and many blue chip stocks were heavily
discounted. This was a great opportunity for value investors like Warren Buffett but Icahn didn’t
stop at just investing in these value companies. Icahn would purchase a controlling share or the
entire company and he would quote on quote “optimize the company”. By optimize, he would
basically strip these companies down to their bare bones and eliminate anything that wasn’t
generating a profit. This might not sound that bad until you realize just what he was eliminating.
For example, he might go in and kill a company’s R&D department. This would make the company more
profitable than ever for the next 3 to 5 years but after that, they’re absolutely screwed. This
was none of Icahn’s concern though as he would’ve already flipped the business by this point. So,
essentially, Icahn and his fellow corporate raiders were basically going around and ruining
companies for personal gain. Icahn’s first target was an appliance company called Tappan. He would
acquire a controlling stake in the company in 1978 and do some gutting. He would then force
the company to be sold to Electrolux netting him a gross profit $2.7 million or a 100% return.
With a taste of success, Icahn would quickly jump up to playing with the tens of millions. In 1983
for example, he would acquire ACF industries and flip it to Philips Petroleum in 1985 for a $50
million profit. At least with those two instances, Icahn was simply flipping these companies. In
other instances, he would straight up blackmail these companies as was the case with Saxon
industries. Icahn bought a stake in Saxonin 1980 and threatened that he was going to find someone
to buy the entire company. This forced the company to buyout Icahn’s shares which netted him a quick
$2 million. So, there was no doubt that Icahn was wreaking havoc quite early on but no one really
fought him. The companies that he was going after were no name brands with not much support. Surely,
he couldn’t pull this off with a true giant. Or atleast, that’s what they thought until he did.
THE BIG LEAGUES:
In 1985, Icahn would pool together all of his investor funds and max out his bank credit
lines to purchase a 20% stake in Trans World Airlines for approximately $70 million. Most
of you probabaly aren’t familiar with Trans World Airlines or TWA well because Icahn would run it to
the ground but we’ll get to that. When Icahn purchased his stake, TWA was the 4th largest
airline in the US. In fact, their planes alone were worth over a billion dollars which was big
stuff for 1985. This isn’t to say that they were perfect. They were dealing with issues
with unions and trying to stage a turnaround but Icahn’s presence ensured that this turnaround
never came. Just a few months after his initial purchase, Icahn would up his stake to just over
50% which gave him control of TWA. And a few years later, Icahn would take TWA completely private
upping his stake to 90%. During a normal corporate turnaround, businesses woud focus on eliminating
the bad parts of the business and doubling down on the good parts, but Icahn would do the exact
opposite. He would eliminate the good parts of the business by selling them off. For example,
he would sell off their popular London routes to American Airlines for $445 million. Pretty soon,
TWA had nothing left but losses and they would unsurprisingly file for bankruptcy
in early 1992 with $540 million in debt. This didn’t really matter for Icahn though as he had
already secured $469 million worth of profit for himself. The story of TWA definitely made
some waves on the news cycles back in the 80s but it wasn’t Icahn that really turned
everyone against corporate raiders. That honor actually goes to one of Icahn’s biggest rivals:
T Boone Pickens. In the early 1980s, Pickens would launch a hostile takeover against Gulf
Oil. This was absolutely unprecedented because Gulf Oil wasn’t just a massive company, they were
straight up a fortune 10 company. Fortunately, the Standard Oil Company of California or Chevron was
able to step in and buyout the entire company for $13 billion which prevented Pickens from wreaking
any havoc. But while this salvaged Gulf Oil, it also gave Pickens a profit of $760 million.
Pretty soon, Icahn was playing with mega billion dollar companies as well. In 1986, for example,
he launched an $8 billion takeover of US Steel. He never ended up taking over the
entire company but that didn’t stop him from making a cool $200 million.
His biggest profit however came in 1989 when he sold his $2 billion stake in Texaco for a
$700 million profit. Things had gone way too far and enough was enough. These tycoons were playing
around with Fortune 10 Fortune 100 companies as if they were lemonade stands. Companies were
understandably not just annoyed but triggered, and pretty soon, they would start fighting back.
COMPANIES FIGHT BACK:
One of the first defenses that came about against corporate raiders was the Poison Pill defense. You
may have heard about this with Twitter as they were indeed using this defense. This defense
basically consists of diluting the corporate raider into oblivion by issuing a crap ton of
shares. This way, the corporate raider is never able to acquire majority control of the company
through the public markets. This is actually how Netflix defended themselves against Icahn. Right
after Icahn purchased a 10% stake in Netflix, Netflix would adopt a poison pill defense.
This was successful at warding off Icahn from buying out Netflix but this didn’t stop Icahn
from making $800 million nonetheless though he would’ve made $40 billion if he held on. Anyway,
another popular strategy that companies adopted was golden parachutes. This doesn’t actually do
anything to save the company or shareholders but it does save the executives. Essentially,
golden parachutes allow for executives to walk away with massive payouts if the company gets
acquired. Twitter’s executives for example walked away with over a $100 million in severance. To be
honest, I wouldn’t call this a defense. This is more a case of executives saving
themselves. A more traditional defense though is the White Knight Defense. We briefly touched on
this actually with Gulf Oil and T Boone Pickens. Remember how Gulf Oil sold themselves to Cheveron
to avoid Pickens? That’s a white knight defense, selling yourself to a friendly party to avoid a
takeover from a hostile party. There are a bunch of other defenses like the Greenmail Defense and
the Employee Stock Ownership Defense. And many of these have been used successfully to defend
companies from Texaco and Gucci to Netflix and Twitter. But, none of these strategies really
took down corporate raiding. Sure, they made corporate raiding harder but they by no means made
it impossible or non lucrative. Heck, the richest man in the world today, Bernard Arnault, made most
of his fortune by raiding the fashion industry throughout the 80s and 90s. And Elon literally
just did one with Twitter, so it’s definitely still possible. But then, why has corporate
raiding become so rare? Well, the primary reason is because investors walked away. Back in the late
1900s, making a 100% return within 3 or 4 years was unheard of but thanks to tech stocks, it’s
been largely normalized. This isn’t to say that a 100% return within 3 to 4 years isn’t a phenomenal
return. It is a phenomenal return but there’s far more opportunities to make such returns. Meta,
for example, has recovered nearly 200% within the past 6 months itself. Why be the villain, destroy
companies, and take on so much risk when you can just bet on up and coming blue chip companies and
make the same or even better returns with far less stress? The answer is no reason at all. All of the
people who would’ve backed someone like Icahn in the 80s have simply turned to backing someone like
Zuckerberg or Pichai or Bitcoin. And that right there is what truly killed corporate raiding.
A NEW CONTROVERSY:
Today, Icahn is plagued with a completely new controversy. At the beginning of May,
Hindenberg research accused that Icahn has been paying out dividends using funds from new
investors. And given that Hindenberg has a pretty good track record from taking down Nikola motors
to taking down the Adani Group, it’s very possible that these accusations are indeed legitimate but
only time will tell. In the end, corporate raiding was an invention that came from investors’ desire
for outsized returns over everything else. This allowed for several raiders to rise to prominence
who played with billion dollar companies on a regular basis as they made billions
for themselves and their investors. Eventually, companies started catching on and started fighting
back with varying levels of success. There’s also an argument to be made that banks become
more reluctant to lend to corporate raiders as a lot of raiders simply failed. But, really,
the bigger trend that killed off corporate raiding was the rise of tech. Investors simply found a new
shiny thing to invest in. Why flip appliance and oil companies when you can bet on tech
companies that reach billions of people. And that is what marked the end of the hunt for Carl Icahn,
the infamous legend who tried to buy Netflix. Do you think some companies deserve to be raided? If
you do, comment those companies down below. Also, drop a like to pay respects to all the companies
that Icahn destroyed. And of course, consider checking out our discord community to suggest
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