Carl Icahn: Netflix Friend or Foe?

by Will Ashworth | November 1, 2012 1:37 pm

Affiliates of Icahn Enterprises L.P. (NASDAQ:IEP[1]), the holding company owned by billionaire Carl Icahn, reported a 10% stake in Netflix (NASDAQ:NFLX[2]) on Halloween. Icahn believes Netflix provides exceptional value for a strategic buyer like Amazon (NASDAQ:AMZN[3]) or Verizon (NYSE:VZ[4]) — someone who will choose to buy Netflix rather than build from the ground up. The news sent Netflix stock up 14% on heavy trading.

The company is now officially in play. Is Icahn’s involvement good or bad for the company and its stock?

When a so-called vulture investor buys into your company, you can’t be thrilled. Netflix CEO Reed Hastings and the rest of its executive officers and board own 5.7%; no other shareholder owns more than Icahn does. At the very least Icahn’s opinions on Netflix’s future — including a potential suitor and ultimate sale — will be heard. Love him or hate him, Icahn forces his targets to define who and what they are … which generally makes them better once he’s moved on.

But while Icahn’s investment in a company tends to get the attention of management and the board, his track record of adding value is mixed.

Back in 2006, Icahn purchased 11.7 million shares  of ImClone at an average price of $33.46, which made him the second-largest shareholder behind the company’s partner, Bristol-Myers Squibb (NYSE:BMY[5]). By September 2006, ImClone shareholders had elected Icahn and two other associates to its board, with Icahn serving as chairman.

Icahn went to work overhauling the biotech company, including hiring a CEO with industry experience and improving its relationship with Bristol-Myers. The damage control worked — Bristol-Myers offered $60 a share to buy ImClone in July 2008; it was eventually sold to Eli Lilly (NYSE:LLY[6]) in October of that year for $70 a share. Icahn spent two years on the board delivering a 109% return for his shareholders … as well as ImClone’s. I’d say that counts as a win.

On the other hand, Icahn began accumulating Clorox (NYSE:CLX[7]) stock in December 2010. By the time he offered to buy the company[8] in July 2011 for $76.50 a share and the assumption of $2.6 billion in debt, he’d built a 9.4% ownership stake. Clorox rejected his initial bid; Icahn countered with an $80-per-share offer several days later only to be met with rejection again.

Clorox’s board felt the offer was inadequate and wouldn’t be completed — but more likely they weren’t keen on Icahn splitting the company into several pieces to be sold at auction. Worse still, Icahn then lowered his $80 offer to $78 with only half in cash and the rest in unsecured notes. That final move clearly lost the support of any shareholders considering his offer. He withdrew his proxy fight on Sept. 23, 2011, after failing to win the confidence of shareholders. Since then CLX stock has chopped between $64 and $74 — $80 is looking pretty good.

Still, the fact that a man who’s 76 years of age is still getting his hands dirty says a lot about his work ethic and how much he enjoys creating value out of thin air. Like Bill Ackman, his reputation is by no means squeaky-clean; that doesn’t mean his financial investments aren’t well intentioned.

Netflix has entered a holding pattern that isn’t good for the company. By Icahn making this investment, it should give Reed Hastings and the board the kick in the pants it needs. If you’re a Netflix investor, this is the best news you’ve heard in a long time, regardless of the final outcome.

As of this writing, Will Ashworth did not own a position in any of the stocks named here. 

Source URL: https://investorplace.com/2012/11/carl-icahn-netflix-friend-or-foe/

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