Chances are as an individual investor, you don’t have much say in the management direction of your favorite publicly listed company. Sure, you may be a billionaire, or even an “A” list hedge fund manager, but chances are (given my small readership) your biggest equity investment doesn’t include much in the way of voting rights. I bring this up because of the latest in Wall Street dramas to hit the business press.
Every so often a story comes up that is worth reading every episode. Eighteen months or so back it was Oracle’s fight to acquire Peoplesoft. Today the most interesting soap opera of the business world is Carl Icahn versus Time Warner. This is a story that promises to play out for a good portion of the New Year. Essentially, Carl Icahn is a corporate raider who is angling for the ouster of Time Warner CEO Richard Parsons, as well as for the break up and sell off its cable assets.
Ever since Barbarians at the Gate, I’ve loved a good buyout story. Partly I enjoy them for the drama, but I also appreciate how some of them are illustrative of how free markets and the “profit motive” benefit the greater good. It’s almost cliché that any time Hollywood wants to portray a businessman as “evil” it reaches for the a fat cat CEO or for the stock “Corporate Raider” persona. Gordon Gecko, as portrayed by Michael Douglass, in the movie Wall Street was a Corporate Raider, as was the “bad” Richard in the movie Pretty Woman. (Don’t get me wrong, as portrayed in the movie, Gordon Gecko was a cheater—not part of a positive free market). I wonder if Hollywood understands that corporate raiders are the bane of the “fat cat” CEO’s existence.
In reality, corporate raiders serve a purpose. Motivated by financial gain for themselves and their investors, corporate raiders cull the herd of the weakest competitors. In doing so, they weed out bad management teams, they add transparency into the finances of public companies, and unlock unrealized market value. It was profiteer short-sellers, among others, that brought the Enron house of cards crashing down. It is buyout artists that find companies that are being abused by their management teams.
Let’s go back to my starting premise. Say you’re an individual investor that is approaching retirement and have held Time Warner stock in your 401k account since 1995. Basically, you got screwed. Time Warner made what is widely called, the worst business deal ever, by overpaying for America Online. Your stock lost a considerable amount of its inherent value in this transaction. If you stuck in there and are still holding the stock you may in fact get some of that value back. One way that might happen is that the company may actually deliver on what it says it’s going to do. Another way is to have Carl Icahn or someone like him come along.
Carl Icahn is smarter than you (probably – certainly smarter than me). He’s also a pretty powerful guy, able to control billions of dollars. Mr. Icahn has made his fortune opportunistically. When he finds a company that he believes is not managing its assets properly, he steps in. He does that by taking a position in a companies publicly traded securities (either stocks or bonds). In effect he becomes a large owner or holder of the company’s debt. Then he becomes and “agitator” for change. Rightly or wrongly, he pushes for changes in the company that he believes will increase the value of the company.
In the current situation, Mr. Icahn believes Time Warner investors should have the choice of owning either cable assets or content assets (both currently owned by Time Warner in a single entity). He thinks the parts are worth greater than the whole, and a part owner of the company is pushing to split them up. Furthermore, he thinks management is overpaid. He points out, “At Time Warner they spend $500 million a year for the top layer of executives, and it’s unnecessary.” Maybe that is a reasonable number, but it does sound like a lot, doesn’t it?
I doubt very much that Carl Icahn is thinking much about your little Time Warner position in your 401k. I could be totally wrong. Maybe he is motivated by helping the little guy. The point is, it doesn’t matter. “Corporate Raiders” have just as much influence on keeping the management of public companies honest as does the SEC. This isn’t to say that corporate raiders have a monopoly on the right way to run businesses. Mr. Icahn could be completely wrong. This could be a play for “greenmail,” essentially an agitator financier’s way of getting paid off to go away – not positive for the company or your 401k.
I don’t want to give the impression that I think everything that results from the break up of a poorly run company is positive. Individual lives are often affected. People get laid off sometimes. Pension funds get raided sometimes. (Both of these happen through management teams sometimes as well). Sometimes the buyout artists are overleveraged, or incorrect in their estimates of unrealized value.
My point is not to paint corporate raiders in a good light as wonderful people. The point is that it doesn’t matter. Their self interest acts as one of many driving forces in an overall free market, and some of those affects have a decidedly positive affect. How will the Carl Icahn versus Time Warner drama end? Only time will tell.
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