On the surface, Carl Icahn’s recent statement “One of the most important things we need in this country is to keep companies accountable” makes the activist investor seem like a decent, reasonable human being.
But for investors who have been around the block a few times, it doesn’t take long to remember that this is Carl Icahn speaking … a man who has a history of destroying companies — and enriching himself in the process — in the name of “unlocking value.”
In other words, while his words sound good, there’s usually more to the story whenever Carl Icahn is “keeping companies accountable.” Before investors cheer his willingness to shake things up, it may be worth revisiting his history of activism.
Remember a little airline called TWA? The company went bankrupt in 1992 (and then filed bankruptcy again in 1995, and then sidestepped bankruptcy in 2001 by selling itself for a song), but the demise actually began in 1985 when a corporate raider acquired a controlling interest in the company. This large investor told the company what it wanted to hear. Namely, he wanted to make TWA profitable. By 1988, however, the raider’s actions and the raider’s words were widely mismatched.
In 1988, this controlling investor took TWA private, pocketing $469 million for himself in the process, and saddling the airline with the $540 million in debt that had been created to facilitate the company’s privatization. The overfunded pension was whittled down to the bare minimum, with the excess going to this major stakeholder, and by 1991, this same controlling shareholder directed the company to sell its best asset to the tune of $445 million. That asset? The company’s routes from the United States to London, largely eliminating TWA’s ability to drive revenue in the future.
By 1993, this large investor — chairman of the board by that time — was owed $190 million by the struggling airline. Unable to pay cash for the debt, TWA gave this individual the rights to buy tickets (for the purpose of selling them at a profit) for St. Louis-connected flights at a price of just a little more than half their retail value … for a period of eight years!
The offer was too generous, and cost the company an estimated $100 million per year. Between the parsing of the company in addition to a fiscally unsound ticket-resale agreement, TWA was unable to remain airborne past 2001, being acquired by American Airlines at that time.
Any guesses who that investor was?
That large investor who seemed like a savior at the onset and then ended up being the harbinger of death who parted the company out to the point of impotence? No, it’s not Gordon Gecko (though the similarities Oliver Stone’s 1988 movie Wall Street are no coincidence). That gentleman was one Carl Icahn.
Where did he inject accountability into the TWA saga? Nowhere.
But should something Icahn did twenty years ago be used against him now? Perhaps activism works much differently — and better — here in the new millennium where break-aparts and spinoffs are no longer en vogue and company-rebuilds and improved competitiveness are the path to unlocking value.
Fair enough … but it’s not like Icahn’s recent track record is spotless, either.
Remember a little company called Blockbuster Movies? The VHS tape, and then DVD, rental company was all the rage in the 80s and 90s and even in the early 2000s, before the advent of Netflix (NFLX) and the ability to watch full-length movies online. Netflix ended up making Blockbuster obsolete, pushing the company into bankruptcy.
But it’s not as if the company couldn’t have walked a wiser path at that critical point in time.