Comment by debt | Hacker News Reader

Comment by debt | Hacker News Reader

Carl Icahn gives a great talk as a guest lecturer in Robert Shiller's economic class from 2009: https://itunes.apple.com/us/podcast/15-guest-lecture-by-carl...

He talks about how many of these companies are run by fraternity presidents and their frat brothers. He calls it anti-Darwinian. You have this likable, but dumb, frat president coming in and becoming CEO. He theorizes that people who float to the top in companies are those who pose no threat and take no risks. So you have the dumb frat president will in turn appoint his frat brother, who subsequently is dumber than him and rose in ranks because he poses no threat to anyone, as his successor, and so on.

He seems frustrated that many of these companies have no accountability, they essentially can do whatever they want. And many times, the smartest people don't float to the top as they should.

So I see Carl Icahn coming in and giving these guys a hard time and can't help but think it's a good thing. Good shake em up a bit.

But are activist investors like Carl Icahn actually a good thing? I mean it's great that they introduce a bit of corporate democracy, but does he actually improve the companies he takes a large position in?

This is an interesting comment, but Icahn's recent actions (last three to four years that I am familiar with) are driven by nothing more than the motive for short-term profit.

The process proceeds along the following lines:

1. Acquire a stake of more than 5%, which requires a public filing with the SEC. This is very key as now the public has a verifiable way of knowing Icahn has a stake.

2. Write a letter to the board and/or management demanding changes to the structure of the company or use of its large cash pile(if applicable). This usually takes the form of a spin-off or buyback/dividend proposal. (Buybacks are more favorable these days due to tax considerations.)

3. The stock price increases at least 10% after it is announced Icahn has taken a stake. Icahn can sell here and take his profits home; 10% annualized is a very large gain.

3. Management predictably scoffs at Icahn's demands or arranges a show for shareholders in the form of a one-on-one meeting with the CEO or something along these lines. Nothing tangible happens.

4. Icahn sometimes is able to pressure firm management/board into buybacks or dividends, which only adds to Icahn's paper profits (see 3). This is usually done through the very real threat of going directly to the shareholders with a proxy to elect new board members. Even if this is unsuccessful Icahn still has achieved 3.

This is known as the 'Icahn tax'. Due to name recognition and a strong track record Icahn is able to exert pressure on firms for a quick and easy buck. Nothing more.

Very well said.

Who's the tax on? If I'm understanding the dynamics here, it looks like it's a tax on shareholders who buy in at inflated prices because Icahn is being an activist, and that once he sells his shares, everything will return to normal. If that's the case, then over time people should realize that Icahn buying into a company is a signal that it's overvalued and that premium should decrease. (In the meantime, he gets to bank large profits off this trade, but his name recognition and track record is a depreciating asset unless he actively improves stock performance.)

I don't disagree with you, but tell me why this is a 'bad' thing if you are saying that shareholding equity is increasing and management is being pushed out of their 'comfort zone' and maybe paying off debt/buyback or dividend?

I guess that would depend on your definition of improve. He is really most interested in 'improving' the value of his holding in the company so he can make a tidy profit for himself and his investors. I'm pretty sure he couldn't care less if the target company really 'improved' after he has liquidated his position.

Edit: Also, one of the big things a lot of activist investors try to force companies to do is issue a larger dividend (or just issue one if the haven't) or buy back stock. These things are good for the shareholders not necessarily the company. It's important to remember that Icahn is a shareholder and is interested in taking care of shareholders not companies.

It's important to remember Icahn is advocating what is good for his shares, not even "shareholders" in general.

What he pushes for can be objectively bad for other shareholders whose positions aren't sufficiently similar to his own.[1]

[1] Perhaps they bought higher, or wanted to hold longer, or were looking for a stable investment where Icahn is pushing higher-risk, etc.

You are completely correct. Icahn is a a billionaire because he's a great investor, but doesn't know squat about running companies, because he's never done it. His positions are always about "maximum shareholder value" when he's a huge shareholder, never when he has nothing to gain. He was a huge corporate raider in the 80s, buying companies and selling off their organs for a profit. The difference between Icahn and Romney is Icahn is even less likeable.

I'm not sure I buy this argument. Short-term shareholders and long-term shareholders both benefit from enhancing the long-term "permanent" value of a company, as you can always just sell some of the stock to realize those gains in a shorter time.

Similarly, if you have drastically less risk tolerance than other shareholders, you are already throwing money away by being overinvested in a single stock. Shareholders who don't want Icahn to take risks with eBay stock shouldn't respond by demanding eBay be run conservatively, they should respond by diversifying their portfolio.

You're arguing two different things. First: if changes to a company enhance its long term value, it may benefit short term shareholders, but logically, long-term holders will benefit more. In fact, if short term holders were to benefit more then it makes no sense to be a long term holder, and if long term holders stand to benefit more, then why would you be selling all, or practically all, of your position? If someone buys a company's stock, insists on major structural changes, and then sells the stock, how can you argue that this investor is acting in the long term investor's interest without either being a financial incompetent or altruistic to the point of sainthood?

For the risk tolerance point, you're assuming that everyone who opposes Icahn is overinvested in eBay, which doesn't follow at all. It may be that you would rather see eBay invest in itself or return excess cash in the form of a steady dividend. Or you may flat out disagree with the notion of spinning off Paypal. Making a stupid decision isn't "risk tolerance", it's "hey man, hold my beer and watch this".

Icahn made his bones as an ur-corporate raiders, systematically buying companies, stripping them of assets, and then using the proceeds to pay off his own debt. Ever see Wall Street? Icahn's Gordon Gekko on steroids.

The thing is, he's not exactly wrong about CEOs, but in my experience the absolute worst ones come out of private equity -- in other words, from within Icahn's world. These are guys who generally became "turnaround CEOs" of large companies in their 30s (or even 20s), and never grasped the idea that there's a difference between the architect and the wrecking ball. They're absolute disasters when they try to actually run a company, because all they know how to do is kill dogs and milk cows.

Icahn's "activism" is broadly similar, robbing from companies' long-term plans to boost short-term investor profits. He also likes to lay about with the axe handle; his accusations of eBay board malfeasance exist at the intersection of ignorance and ambition.

Case in point: his Skype accusations. It's not like Skype was overperforming when eBay sold it off; eBay had failed to make use of the company's tech, and the sale let them keep about 35% of the value in the company while letting someone else run it. If I recall, they bought the company for about $3b, sold 65% off for a hair under $2b, and then got $2.5b from the MSFT purchase. Icahn seems to think that MSFT's valuation indicated that eBay could have sold that turkey for more, but that seems unlikely -- when MSFT bought it, Skype had put its IPO on indefinite hold, and no one else even put in a bid, which indicates that if anyone should be furious, it's Redmond's own shareholders.

The point is that there was a buyer (MS) who was presumably willing to pay more than what eBay sold it for.

He is SOOO RIGHT!

I hung out with a bunch of Verizon mobile executives around 2006-2007. You have never seen so many morons working at one place. They were all supremely frattish (is that a word)? Far as I could tell, their main skillset was drinking and playing politics well.

I would try to explain to them how it was important to make Verizon phones and their certification process more developer friendly, and their eyes would literally glaze over as they diverted the conversation back to sports and drinks.

I left that industry, but I got the distinct impression that Verizon's team did not promote based on technical IQ, competence, or industry-savvy. And these guys were all VERY well paid. Nice late-model Beemers. Nice suits. Contribution to the company ... nil, far as I could see.

I used to work with major telecom accounts as a jr PM/analyst and saw first-hand vendor negotiations with multi-million dollar accounts (say, $10MM per year in spend with AT&T for example).

These executives are well paid because politics/provider capture is highly important in accounts that large. They create a mini fiefdom around these accounts. Normally, if you see a huge change-over (say, AT&T for 10+ years, then show (my former company) that they have been over spending by 30% and cut the cost in half, the entire team will get fired from VP to Procurement. Many times, a $5MM account would have a Sr. VP (say, or Americas) involved if it looked like they could move away.

It is not to hard to understand why politics are 1. necessary, and 2. valued, but, 3. positive AND negative towards companies.

3. refers to politics being necessary in companies, especially diverse/global firms. I performed some Organization Behavior research (which I don't have on hand), but, politics can create "positive" fiefdoms, in relation to protecting a team from outfall of higher-up politics, procure more resources for that team, and other positive effects by way of "good" politics by the manager.

It flows both ways.

A research paper by four academics from different universities and published by the Federal Reserve in 2006 found no evidence that hedge funds destroyed value for the companies or were short-term focused.[1]

I have not gone through the whole paper myself, but it was noted in one of the books I read recently (I forget which one specifically mentioned it, I think John Bogle's "Enough").

[1] http://www.fdic.gov/bank/analytical/CFR/2006/oct/hedge_fund....

Linux users can use Tunesviewer[0] to get at that Podcast (it's behind some weird itmss:// protocol)

"I can't remember if the car left first, or the girl left first".

http://tunesviewer.sourceforge.net/

Or get RSS from feedflipper: http://feedflipper.net/convert.php?feed=https://itunes.apple...

Or use this MP3 link:

http://a1927.phobos.apple.com/us/r30/CobaltPublic4/v4/83/1c/...

I have seen just about every negative Carl espouses in both public and private companies. I have also had relationships with government agencies at all levels--a variety of local, regional and national governments. Government entities are almost always more appropriately organized, better documented, more fiscally responsible (etc.) than commercial entities.

It's surprising that, in my experience, corporations are administered with a greater degree of freedom, more inattention-to-detail and a greater degree of laxity in operations than government agencies. I have heard "Good enough for government work" and other government-related jabs during conversations and cocktail party exchanges countless times. But, my experience is that industry as a whole is not as well organized and has much less oversight than most government entities.

I believe that the empirical evidence supports that these guys do improve shareholder returns. It's not altruistic, they're doing it for their own position too, and they don't really care what happens after they leave.

There is definitely something to be said for execs protecting their position rather than their company, especially when they are paid subjectively rather than corporate performance. (Or if they take corporate performance as a given)

Here is the case against activists having a positive impact (which I disagree with, but share for the sake of being balanced): http://blogs.wsj.com/riskandcompliance/2013/09/30/lipton-tak...

Here is a paper that I agree with that highlights the persistent positive impact of activists: http://econ.as.nyu.edu/docs/IO/30891/AlonBrav.pdf

This is the poison that runs deep into most tech companies as they grow larger and attract various MBA's with amazing pedigree to become all sorts of managers. Sooner or later, you start having stack ranking.

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