Carl Icahn is now the largest shareholder in Family Dollar Stores, Inc. (NYSE:FDO). The aggressive activist investor disclosed a massive stake in the consumer goods retailer on Friday. Family Dollar’s stock is soaring today on the news, up over 14% already.

Carl Icahn

Icahn is now the largest stakeholder, company responds with poison pill

Icahn revealed a stake of 10.7 million shares, amounting to a 9.4% ownership, via an SEC 13D filing. As is the custom with Icahn, he plans to campaign for board seats, saying that shares of the company are undervalued. Icahn said that the situation at Family Dollar Stores, Inc. (NYSE:FDO) is similar to the what went down in CVR Energy, Inc. (NYSE:CVI), Forest Laboratories, Inc.(NYSE:FRX), Chesapeake Energy Corporation (NYSE:CHK) and Biogen. The named companies are all successful activist campaigns that Icahn has previously completed.

In response to Icahn’s formidable stake, Family Dollar just adopted a poison pill to limit any further buying activity. The one-year long poison pill is to prevent increase of over 10% in ownership. Icahn plans to push for a merger between Dollar General Corp. (NYSE:DG) and Family Dollar Stores. In response to this favorable news, Dollar General’s stock is up nearly 12% today. Dollar General is  also held by a group of hedge funds. Lone Pine Capital, Tiger Global, Glenview Capital and Third Point all have holdings in the company.

Dollar General’s interest in Family Dollar

According to latest notes from Jefferies, Dollar General Corp. (NYSE:DG) could be an interested party in this scenario. Jefferies’ Daniel Binder said that the merger could help in tackling competition from Wal-Mart Stores, Inc.(NYSE:WMT). The analysts raised their ratings to Buy for both FDO and DG.

Singing the opposite tune, Raymond James’ analyst Dan Wewer and Aziz Pirbhoy think that Dollar General will not be interested in the acquisition. They said that FDO is expensive and will not provide Dollar General Corp. (NYSE:DG) with any new real estate opportunities, which makes a buyout offer unlikely. Raymond James maintained that Family Dollar Stores, Inc. (NYSE:FDO) is going to disclose a difficult earnings period in July and the stock is overvalued. The analysts have an Underperform rating on FDO’s stock.

Activist hedge funds’ holding now equal to 23%

Family Dollar has been previously targeted by Trian Partners in 2011. The reaction was similar to the one we saw today, the company adopted a poison pill. Train agreed to a standstill in exchange for a seat on the company’s board. After Icahn’s stake, the ownership of activist hedge funds is now up to 23%, which makes it far harder for FDO to quash them this time.

Family Dollar Stores, Inc. (NYSE:FDO) has been a favorite holding of hedge funds for some time. Nelson Peltz’s Trian Fund Management held 8.36 million shares of the company at the end of the first quarter. Paulson & Co. owns 6.47 million shares, whereas Larry Robbins’ Glenview Capital’s holding is just shy of a million shares along with a million call options.