I have been a close follower of Mr. Carl Icahn’s deals since I read the book “King Icahn” a few years ago. He is the ultimate activist investor and this year he has been particularly aggressive. The 77 year old billionaire has been very publicly involved into three big US companies. To start with, he has been fighting his fellow billionaire investor Bill Ackman regarding Ackman’s short position in Los Angeles based company Herbalife Ltd. (NYSE:HLF). Icahn has also been fighting Transocean LTD (NYSE:RIG)‘s management asking for a more generous payout ratio. Finally, a week ago, Icahn got involved into Dell Inc. (NASDAQ:DELL)‘s $24.4 billion buyout plan. It’s been only three months since 2013 started, but King Icahn has not been losing his time. Let’s take a quick look at what he is doing in these three companies. We can always learn something from a man who has been making profitable investments for more than 50 years.
Herbalife Ltd. (NYSE:HLF)
As my Columbia professor Bruce Greenwald used to say, when a transaction takes place somebody is right and somebody else is not necessarily wrong. This is particularly true in a situation when someone has a huge long position in a company – Icahn – while someone else – Ackman and his hedge fund Pershing Square – has an equally huge short position in the same company. Herbalife Ltd. (NYSE:HLF), which sells weight-loss products and nutritional supplements using a network of independent distributors (like Tupperware and Avon), has been accused by Mr. Ackman of being a “fraud” and “a pyramid scheme” that should be put out of business by federal regulators. Ackman says he is certain Herbalife Ltd. (NYSE:HLF)’s stock, which is now trading at around $41 per share, will go to zero. When Ackman made his opinion public in December 2012, the stock was trading at $42. By Christmas Eve the stock was down to $26 and here is when Icahn made his move. Icahn, knowing that Herbalife, which ships its products to 88 countries and has only 20% of its business based in the US, could survive even if the US authorities would find its business illegal, decided that he could go long Herbalife Ltd. (NYSE:HLF) and orchestrate a “short squeeze” on Ackman. A “short squeeze” happens when the investor who is short decides to close his position and, therefore, he has to go into the market and buy his previously sold shares pushing the price even higher and increasing his mounting loses. Icahn is not alone, another great investor, Dan Loeb, has done the same thing and went out to buy Herbalife ‘s shares. When in February Icahn announced that he had accumulated a 12.98% stake in Herbalife and that he intended to meet with the management to discuss “enhancing shareholder value,” Herbalife’s stock soared. Maybe Loeb and Icahn have been selling shares since the shares went up. It’s almost impossible to know. Nevertheless, Ackman still claims that Herbalife Ltd. (NYSE:HLF)’s true value is zero. We shall see the end of this story soon. By the time being, Icahn seems to be the winner.
Dell Inc. (NASDAQ:DELL)
Dell’s deal is far simpler. Icahn claims a higher price for his accumulated position. Mr. Dell and private equity firm Silver Lake proposed to take the PC maker private at a price of $13.65 a share. That price is nearly $10 short of what Icahn says Dell Inc. (NASDAQ:DELL)’s intrinsic value is. Actually, Icahn is proposing something else: he wants to use the company’s cash and borrowings to pay out a large one off dividend (he says $9 a share) and still leave existing investors with full ownership. Icahn’s proposal is not insane but is probably just a way of negotiating a higher price for the buyout. Dell now trades in excess of $14. The market expects Mr. Dell to make a second (and more generous) offer. I would expect the same. In this case I am sure of Icahn’s success.
Transocean LTD (NYSE:RIG)
Transocean, the world’s largest offshore drilling contractor by market capitalization, has answered positively to Icahn’s claims: the company is ready to pay a cash dividend. The board recommended a dividend of $2.24 a share to be paid in installments from June 2013 to March 2014. This is less than Icahn’s $4 claim, but it gives a hint on how the company reacts to shareholder pressure. The move might seem bold for a company which is trying to de-leverage and reduce its $12 billion gross debt position while is preparing to face up to $2.6 billion on further claims on its involvement in the Deepwater Horizon disaster. That said, I think Icahn has made his numbers and he must be sure that the company can pay what he is asking for. After all, he owns 5.6% of the company. Undoubtedly, there is nothing better than the keen eye of a smart owner to push on better cost management and results.
One thing we should learn from people like Icahn is that best results are attained when we think a businessman. Stocks represent real ownership of real businesses and shareholders hold a great deal of power. In my opinion, investors like Icahn make the market a better place for all investors. Through their fights, minority shareholders end up (almost) always in a better place.
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