Like a politician bobbing and weaving during an election cycle to change the issue to his advantage, activist hedge fund manager Carl Icahn, in a mud-dragging, bloodcurdling fight with eBay’s corporate board, had previously stated his primary goal in a battle with eBay Inc. (NASDAQ:EBAY) is separating subsidiary PayPal from the mother ship, selling the electronic payment processor to the highest bidder so as to produce a higher stock price for investors.

Given this is the primary issue, why hasn’t the public debate mainly focused on the intellectual argument behind the breakup logic?  Judging from the volumes of his public statements and press reports he inspires, the more visible issue is Icahn calling into question eBay’s board of directors.

carl icahn Adreesen

In a tweet on March 21, Icahn reiterated his issue with eBay Inc (NASDAQ:EBAY)’s board of directors by showing support for an article by Fortune Magazine reporter Paul Hodgson which questioned eBay’s board governance. The primary focus of Icahn’s ire has been the board of directors, with particular venom targeted at board member Marc Andreessen, the venerable Silicon Valley paragon, founder of Netscape and now an investor in early stage technology companies, who is now having his reputation publicly flogged by Icahn.

And herein can be found insight into what is really behind the activist hedge fund strategy: intimidation.

The secret to activist hedge fund strategy is to have a “rip your face off” reputation so as the mere mention of the hedge fund manager taking a position in the stock is enough to make a member of the board of directors’ fear for their long-fought reputations — and drive the stock price higher.

When an activist hedge fund comes calling, corporate boards increasingly quake

For a corporate board, fighting an aggressive activist hedge fund manager can have significant personal downside.  Just look at the story of the eBay, which some observers say has taken personal attacks on luminary members of the board of directors to a new level.

Icahn has accused eBay board member Andreessen of unethical behavior by representing his own interests ahead of shareholders.  In particular, Icahn points to Andreessen’s personal investments made in eBay Inc (NASDAQ:EBAY) subsidiaries Skype and GSI Commerce.  Skype in particular was sold by eBay to a group including Andreessen interests which purchased 56% at a time when Skype was valued at $1.9 billion.  The group turned around months later and sold Skype to Microsoft for $8.5 billion.  In its defense, eBay has noted that Andreessen had recused himself from discussions, but to get into the debate misses the point.

Did eBay’s stock price already reach the breakup value at $59 per share?

What remains unsaid in the Icahn / eBay fight is that Icahn may have achieved his financial goals – but he continues to fight nonetheless.  Icahn’s investment thesis is all about the breakout and sale of PayPal.  Independent analysis of the stock has indicated the breakup value of eBay is near $59 per share. At that point Icahn had profited over $100 million on his reported 2% stake in eBay.  (The stock price has since slid to near $57 per share as Icahn appears to be backing off his demand for a full breakout of PayPal.)

So why didn’t Icahn take profits when the stock hit $59?  Could it be that the eBay battle —  described as among the most personal attacks on an icon of the business world in history — is about building the corporate raider’s reputation?

Icahn’s goal for eBay

Icahn’s goal is to intimidate the board of directors so his position prevails.  What happens with eBay is going to speak to Icahn’s reputation as a fighter, which has a distinct currency when it comes to intimidating future corporate boards and talking up a stock price.

It could be said Icahn has already achieved his financial goals, but seeks something larger.  The eBay Inc (NASDAQ:EBAY) buyout could be about making a statement to the world. Much like on a hockey team, where the value of a known fighter, an enforcer, increases with his reputation, Icahn is increasing his intimidation currency with eBay. Some fighters can intimidate a team without ever dropping the gloves. This is currency that can be used in future fights, which could be Icahn’s real goal.

In the future when Icahn’s intention is simply made public, will the board of directors, fearing a personal attack, succumb to the intimidation?

This could already be happening.

As previously reported in ValueWalk, academic studies show activist hedge fund managers are getting their way more.  Without even fighting, corporate boards are succumbing to activist hedge fund demands – and cooperating without even putting up a fight – at an ever increasing rate.

Thus when considering the Icahn / eBay spat, consider that this could be as much about Icahn winning and expanding his reputation — which likely has a much higher value than the breakup of eBay and PayPal.