Value Investing

Carl Icahn: The Genesis Of The Great Corporate Activist

One of the best books written about Carl Icahn is King Icahn: Biography of a Renegade Capitalist, by Mark Stevens. The book is the story of a man who rose from humble beginnings to emerge as one of the the most powerful activists in corporate America.

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Two passages in particular encapsulate the early thinking of Icahn. The first discusses the two lessons Icahn learnt from his early disappointment on Wall Street, and the second is the roots of Icahn’s manifesto, which can be found in the conclusion of his Princeton thesis.

Here are two excerpts from the book:

Icahn’s first experience with a Wall Street boom-to-bust cycle was certainly a disappointment, but it also taught him two lessons he never forgot. First, no one makes money playing the market. A small investor dabbling in stocks is always vulnerable to bigger, more powerful forces that time after time will wipe him out.

Second, if he was going to emerge as a dominant force, he needed more than a broker’s training. He had to gain expertise in a market niche overlooked by the hordes of brokers content to sit by the phone and take orders. His study of empiricism had taught him that “there is a strategy behind everything,” and now he had to determine what that strategy was.

Unlike his peers, who viewed the peaks and valleys of the stock market as an inevitable part of the business, Icahn the empiricist, Icahn the chess player, was determined to outsmart the system or at least to find a void he could exploit.

That the stock market had bested him would prove for Icahn to be a blessing in disguise. The swiftness of his gains and losses made him realize that this was a business of enormous complexity and equally enormous rewards for those who could decipher the codes. To succeed required patience, intelligence, determination, and the ability to concoct shrewd strategies involving intricate and interrelated moves—precisely the kind of process that had always appealed to Carl Icahn.

***

“It is our contention that sizeable profits can be earned by taking large positions in ‘undervalued’stocks and then attempting to control the destinies of the companies in question by:

a) trying to convince management to liquidate or sell the company to a ‘white knight’; b) waging a proxy contest; c) making a tender offer and/or; d) selling back our position to the company.”

With this “Icahn Manifesto,” the one-time bookworm from Queens had found a way to intimidate corporate America, driving the CEOs of the Fortune 500 into a corner, using his opponents’ own greed and imperiousness to defeat themselves.

Interestingly, the roots of Icahn’s theory can be found in the conclusion of his Princeton thesis.

“It seems to me that the quest for an explication of the empiricist meaning criterion, as it has progressed, may be likened to the tale of the city that suddenly finds itself in possession of a great homogeneous mixture of gold and sand. If the gold could be separated from the sand it would prove a great deal more valuable to the inhabitants. The wise men of the city diligently search for a method of separation. By so doing they not only vastly increase their insight into the nature of gold, sand, homogeneous mixtures, etc., but also produce a series of increasingly potent methods of separating the chaff from the gold, the meaningless from the significant.”

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