When Carl Icahn Ran a Company: The Story of TWA
blog.pmarca.com
blog.pmarca.com
Carl Icahn has recently bought a bunch of ebay stock. He has claimed the company is mismanaged. He has also personally attacked Marc Andreesen. Here is the accusation from Ichan:
1) Marc Andreesen was/is on ebay's board.
2) While on ebay's board, Marc bought most of Skype from eBay.
3) He flipped Skype to Microsoft in less than 2 years, earning himself a multi-billion dollar profit.
Carl Icahn is running Marc Andreesen name through the mud. The basic accusation is that if Marc knew Skype was so valuable as the smart phone wars were heating up, he had an obligation as a board member to give ebay better advice on the divesture.
Now Marc is fighting back.
This is a comic schoolboy fight among billionaires.
Edit: After a bit of fact checking, it looks like A16Z only invested $50M in the skype deal. Their fund at the time was around $300M. His gain was on the order of $150 million, not billions. A16Z only had around 2% of skype, and ebay retained 35%.
As for Andreessen's motive, I suppose he probably thinks Icahn is making a power play and is more interested in fending off Icahn than in defending himself in this particular instance. Icahn clearly wants Andreessen on the defensive, so it kind of makes sense, though it all feels a bit embarrassing.
The question for Andreessen is that did he think (and could prove) that he's a more ethical businessman than Icahn (note I am not saying a better person here) Apparently not, at least in the Skype sale.
* Throughout the eBay board’s process of divesting Skype, I fully disclosed
my potential interest and recused myself from all deliberations on the
transaction, including all discussions, negotiations, and decisions. I was
uninvolved in eBay’s decision to spin off Skype and in eBay’s decision to
choose to partner with the Silver Lake syndicate.
* eBay’s retained ownership in the Skype spinoff was 30% vs. Andreessen
Horowitz’s approximately 3%. That much larger ownership gave eBay a far
bigger role in decision making on Skype after the spinoff than Andreessen
Horowitz, as well as a far bigger economic payoff on the sale to Microsoft.
http://blog.pmarca.com/2014/03/03/my-statement-on-ebay-director-role-and-governance/
Anyway, it does seem a little sketchy, but on the other hand, marc seems to have acted well within established business practices.
(3) Restrictions on use of company confidential information by
any director for any purpose other than that company’s benefit.
Even a wikipedia quote is problematic:
"Through our research, we found that Skype had a core group of engineers who were completely dedicated to the mission. They stayed through the eBay acquisition and were hugely determined to make Skype the communications company of the future."
Did he learn that as a board member, or from research done at a16z?
https://www.youtube.com/watch?v=hCZRk1lL90Q
Well worth the listen.
It blows my mind how people can be fooled by money.
Icahn is professional liar and has profited greatly from his ability to fool and deceive.
I don't know the whole story behind this, but Icahn calling out Andreesen for enriching himself at the expense of a company is laughable. The pot calling the kettle black.
Regardless, it's too super rich guys throwing feces at each other.
I have a slight inclination to believe Andreesen, but who knows, really.
Even his Twitter profile bio agrees:
"Me, I make money studying natural stupidity."
It usually sucks to be the employee of a company that's just been LBOd because layoffs are almost certainly coming, and whether they are or not, you're going to have to do more work, probably with less resources.
But for society as a whole it should be a win if competently executed; getting the same product/service out of less resources leaves the now excess resources free to be used elsewhere.
Or its about forcing companys to do trendy things - bad for the long term by selling off core assets on the cheap BT selling O2 is a classic example.
Once you are in public domain I think in the long run being subject to all sorts of positive and negative inputs e.g Icahn, Pershing square weed out weak links and bad fruit. Many times good fruit gets thrown out too without realizing the tree will not yield any more produce if done so.
Finance has a very simple function in terms of what it does for companies. If its making money => it works. If it WAS making money and isn't now => it can still make money with change.
Nowadays, it's a place to get ripped off. I have to say that I haven't even thought about eBay for many months.
1. Cheap crap from Taiwan
2. Random appliances parts (when something breaks and all you have is a part number)
without giving your credit card to some Chinese or yet another made-in-90ties warehouse website.
What exists like this now? What market would be best served by this? Is your app in to YC yet?
The company has growth being driven by things like Paypal, enterprise storefronts and subsidiary brands abroad.
Note: since this $300MM fund, a16z has gone on to raise enormous funds many multiples of the size.
The shareholders could simply kick him out if they felt he wasn't doing his job. Instead they re-elected him with near-unanimity.
The alleged behavior in question is not that he didn't do his job, but that he committed various torts and federal crimes.
The world that's being eaten is the world of Icahn and wall street financiers like him. The tech industry has its own source of finance (namely angels, vcs, y-combinator etc .. people like pmarca). Icahn's recent attention seeking is a symptom of the despair he feels at no longer being needed.
Good riddance, in my opinion.
Icahn can bring a modest fraction of his $22 billion to bear on any given situation. That might work against financially weak companies, or companies he dwarfs (like if he picked a fight with Groupon's leadership).
Financial power players like Icahn will never go away so long as there is wealth and capital. Mostly I think he's guilty, in the Apple and eBay situations, of thinking he is much more powerful than he is (and that's saying something given his history), as he has lately been starting fights with very healthy companies far larger than he is.
Tech companies tend to be strongly controlled by the founders/early employees/ and early investors. These are all people who bought in to the vision of the company .. they are by and large true believers. In younger tech companies, like Google or Facebook, this control is truly absolute. There is nothing public shareholders can do.
But even in older companies like Apple or Microsoft, the founders have an almost religious appeal over the stakeholders, particularly employees and the board, but also the shareholders at large.
For example, Tesla and Spacex, though within Icahn's "striking range", might as well be subsidiaries of Musk enterprises. There's no way someone like Icahn would have a chance of besting Musk in a showdown.
Gnats don't concern Exxon, they get swatted. At that scale, Icahn is a gnat. Exxon would have to be extremely mismanaged to inspire so many investors to line-up for a serious proxy battle. Simply doesn't happen unless a company is on its back, or knee deep in a huge scandal relating to the leadership.
If you buy a billion dollars worth of Exxon and try to stir up trouble, you'll be completely ignored unless the company is being very poorly managed such that much larger fish than you are willing to join your cause.
With eBay, since Icahn is a relatively small fish (in terms of what he can personally leverage into the battle) trying to force the hand of a $75 billion enterprise, he's going to need much larger fish than himself to join his cause. He simply can't do it himself. That's the other point I was trying to make about their scale. The larger the company you take on, the larger the total resources you're going to have to get lined up on the same agenda.
Not saying I like it, just saying it's reality.
Also, Carl Icahn introduces the idea corporate democracy which is a good thing considering how much influence corporations have over our lives. The idea that at least one person can affect the outcomes of a large company like ebay perhaps shows other large firms they have the same potential.
I imagine a future where there are kickstarter-like shell entities which acquire large shares of important corporations and where backers can all vote where Exxon chooses to drill next or which companies Google should be acquiring(obviously GOOG is a bad example because they've been doing so well but hopefully you get the idea).
I know this is the basic idea behind holding shares, but perhaps the voting power can be more evenly distributing in these shell entities. In the current structure one share doesn't get you much voting power in a corporation.
Are you suggesting that Facebook/Google had no value prior to their IPOs? Their public market cap is merely a reflection of the value they already provide to society.
Constitutional democracy is the least worst way to preserve individual liberty. It's not a good way to run a private corporation.
First, Wall Street's role in capital markets towers over Silicon Valley. Venture Capital Assets Under Management is approximately $200 billion. Blackrock, the world's largest fund, has $4.3 trillion AUM.
Second, while I believe pmarca acted entirely in good faith and is legally in the clear, there is enough "there" to begin fighting a proxy war. For example, the (tech) market was more forgiving when Dan Loeb fought Yahoo because it got the outcome we wanted (Marissa joining, Yahoo focusing).
Let's not conflate what is arguably an ill-advised but legally legitimate proxy war with a misdirected turf war between finance and tech. As a point of reference, I'm a tech co-founder (who poorly codes) and a former investment banker.
The link below informs much more of my world-view however. http://lesswrong.com/lw/jna/finance_as_a_career_option/ajkc
True, but what's the delta? Where are the sources of new power (and subsequently wealth) being generated? Why, for that matter, are you a former investment banker and now a tech-cofounder and coder? As I'm sure you know, you're not the only one who's made that (smart) move.
What moving around money was to the 19XXs, moving around information is to the 20XXs. That's the crux of "software is eating the world".
AUM doesn't seem a useful metric for power, in fact it's debt and so it all depends on what you do with it. What % of those assets are depreciating? How fast are the % of assets that are appreciating doing so?
I know little about capital markets, but these seem like the obvious begged questions, don't they?
I moved into tech because I liked it, not to make money. If I were still in investment banking, I'd be making 7figures a year (and killing my soul in the process). This is not a judgment call; it's a personal choice. There exists good-willed bankers as well as selfish, rent-seeking coders.
Moving money around has not been limited to the 19XXs. It's been around since humans put a face of an important person on some piece of metal (actually earlier, but it lacks the imagery).
Of course, people have always moved money (and information) around (and always will). Just as we've always moved goods around. That wasn't my point. When "Brittania rules the waves" became Britain's national anthem, it was because ruling the waves (and moving goods) was the main source of power in those days. Since then, shipping has become a commodity. This is now happening to finance.
This isn't really an apples to apples comparison. Most of the money managed by the big players like Blackrock is in funds that are tied to specific benchmarks and have very restrictive mandates. Relatively little of it can be redirected towards funding new companies.
We're talking about leverage and wealth generation. Big AUM means bigger fees. Non-VC funds like hedge funds and private equity are incentivized to have huge funds because they get the fees. Since most of their work is financial engineering, more AUM means more leverage and is an advantage.
Large VC funds are disadvantaged because they're investing in growth. A 20x return off a $5M investment is more common than a 20x return off a $100M investment.
I don't think it helps either community to pit one against the other. Finance and tech are different and serve different purposes and let's leave it at that.
AUM is debt .. so its value depends on what is being done with it. To what extent that these assets can be used for "financial engineering"? They seem rather illiquid to me (and apparently the market, which feels that BlackRock's 11k employees and $4.2 trillion generate less than a third as much wealth as Facebook's 6k employees and $18 billion in total assets "under management").
And how is funding successful new companies not wealth generation? Y-Combinator has invested a total of ~$10m invested for approx a 5% share of ~500 new companies with a valuation greater than $20b and growing. It's annualized RoR is north of 50% for nearly a decade, and likely to increase henceforth.
By contrast, Berkshire Hathaway grew at ~20% for ~50 years. I predict YC will blow those numbers out of the water.
Can we get back to my original response to the original post: 1. Is finance irrelevant to tech as the OP suggests. I think we can both agree that it is NOT irrelevant although we can both agree its importance (as a % of GDP and in society) has diminished.
2. Does Icahn have LEGAL legitimacy for his claims. I think we both agree that there is some legitimacy, even if we don't believe in it.
3. What is the desire to pit tech vs. finance coming from? Why can't both co-exist? Who values Facebook? Investors who make money off it.
By the way, if you think YC is going to beat Berkshire Hathaway in terms of net IRR during a comparable time-frame, you're either trolling or have a limited history of venture and angel investing. Furthermore, it's worth noting that Berkshire is doing this at a much larger base, which makes Buffet's IRR that much more impressive.
1 & 2, pretty much agree (as you suggested).
3. It isn't my aim to pit (or not to pit) these industries against each other. These are merely my observations and opinions about the direction that things are headed.
My prediction about YC/BH is entirely consistent with everything else I've written in this thread. I absolutely stand behind this prediction (with the force of all my (acknowledged) insignificance).
Why would I make such a bold claim?
1. Berkshire Hathaway / Warren Buffet are symbolic of and exemplify all that was right with finance in the 19XXs and why "moving money" was so important for wealth generation in that century. I hold them in extremely high regard (as people should, in my opinion).
2. Similarly, Y-Combinator exemplifies the best of tech startup investing so far this century.
3. While (clearly) very different in many ways, both organizations are easily mistaken to be mere investors when they add a lot more value than just money. It would be just as much a mistake to view YC as a venture or angel investor as it would be to see BH as a "private equity firm".
4. This ~century is going to be fundamentally different than the last. What "value investing" was in the 19XXs is what "black swan farming"* is going to be to the 20XXs. Just as BH defined value investing, YC has defined, and will continue to define black swan farming.
5. I could go on, but I have to get to bed.
That's one way to look at it.
Another is to note that Icahn built a thriving financial company that has survived for over 4 decades, and employs over 60,000 people globally. I'd say that requires long term thinking and demonstrates a bit of business acumen.
Or did you mean he has ownership stakes in industrial firms that employ 60,000 people? Because he most certainly has never created 60,000 jobs by starting a company.
Do you think that large, multi-billion dollar financial conglomerates run themselves?
>Or did you mean he has ownership stakes in industrial firms that employ 60,000 people?
Both. Through wholly-owned subsidiaries and the financial holding company. What does it matter?
My point is, painting him like he's some inexperienced financier is utterly disingenuous. I know it's en vogue to hate on "banksters", but his business experience (and, in my opinion, economic value-added) is of a magnitude greater than Mr. Andreesen's.
Medium-size (Icahn is no Goldman or BlackRock), multi-billion dollar hedge funds and private equity groups (and similar) do not have 60,000 employees. Take a quick look reference at how many people Buffett has employed in his offices over the years. The industrial firms he owns stakes in employ lots of people, he didn't start those companies of course, and he doesn't run them.
BlackRock has 11,000 employees with a couple hundred billion in assets. Goldman Sachs has 32,000 employees with $911 billion in assets under management. To name two examples.
I'm willing to bet Icahn's financial company is extremely small in fact and employs very few people relative to the value of its holdings.
What does it matter? Because I'm fascinated by where those 60,000 people are employed.
Who's hating on bankers? Not me. Who said he isn't extremely savvy? Not me. I asked where you got the 60,000 figure, simple.
Their 10k lists each subsidiary and the number employed:
http://www.ielp.com/sec.cfm?SortOrder=Type%20Ascending&DocTy...
2/3 are employed by Federal Mogul, an automotive parts supplier controlled by IE.
Heads I win, tails you lose.
Curious what your opinion is of Mr. Andreessen, and the conflict-of-interest accusations? is he included in your "leeches" remark, or does he get the SV pass?
The story is plausible. If I were an eBay shareholder, I'd be incensed.
Profit is a measurable of how "right" Carl Icahn is.
I have an MBA. I have nothing against making money. But while it's possible to make money by creating something of value, it's unfortunately possible to make even more money while doing the opposite.
It appears that TWA owed him money so he negotiated the cheap ticket as a form of payment...[1] How convenient that Marc left that out of his blog post...
In the interim, Icahn negotiated for airline vouchers from the company in lieu of the $190 million that TWA owed him. As the deal included the provision that he could not sell these tickets through travel agents, Icahn founded LowestFare.com, where he both sold the tickets and created a revolution in the travel industry.
[1]http://www.investopedia.com/articles/financial-theory/08/car...
I don't know enough about the TWA business dealings, but sometimes a company is more valuable broken up.
One of those creditors, to the tune of $190 million, was Icahn. He resigned as chairman in 1993, and by 1995 he was growing impatient to be repaid. TWA executives, desperate to bring the tragic Icahn chapter to a close, gave away the farm, the cows and the farmer’s wife. They came up with a deal called the Karabu ticket agreement, an eight-year arrangement that allowed Icahn to buy any ticket that connected through St. Louis… for 55 cents on the dollar and resell them at a discount.
Then of course, if you believe that the company is undervalued and can grow (and that is why you would buy it, anyway), you wouldn't try to force them to pay your money back, because they could generate a positive return on the money.
It's possible that TWA couldn't have been turned around and selling it off was really the best return he could get on his investment -- but I think it's at least debatable whether Icahn did anyone else much of a service. The other shareholders got to exit a company they'd lost faith in and hopefully made some money in the process, but that seems to be it as far as silver linings go.
He uses wildly over-dramatic statements ('ebay is the worst run company ever') to try to force boards to do things that are specifically in his short term interests. He has absolutely no concern for the long-term well being of a company. After he gets his stock pop, he liquidates and is gone. Icahn's entire strategy operates strictly on the basis of greenmailing the leadership of a company into discharging cash into his lap. He will say anything he has to in order to generate that outcome.
I'm not sure that's a good defense: "He's killed twice as many people as I have, and he's been at it longer, too!"
When people so alike bicker like this in movies, they're usually about a minute away from kissing.
I deeply respect pmarca but I can imagine that he, like any high visibility person, has many detractors. What power does Carl Icahn have that warrants such a strong response?
http://online.wsj.com/news/articles/SB1000142405270230407100...
http://blog.pmarca.com/2014/03/03/my-statement-on-ebay-direc...
Can any mods delete my submission and update this URL to that URL? It seems illadvised to have this item pointed at pmarca's blog homepage vs. the item we're discussing.
Instead, it's in danger of turning into a mud-slinging contest.
Bought 20% of company.
made it private.
Sold London route.
So, how can someone with 20% make a company private? And how can someone having his shares bought back after company went private still command it to sell anything?
Was he ceo all along?
Icahn secures a loan from a bank (or group of banks/financiers - possibly even one of his other companies, I don't know what the law is like in this regard in America) to purchase enough shares to take the company private.
Here's the 'trick' though. That loan is not secured by Icahn, it is secured by the company he has just "bought out" - the repayments of the loan being secured against the companies current capital assets and future profits. In effect Icahn gets the company to take out a loan which he uses to take control of the company.
Obviously there needs to be enough shareholders willing to sell for this to work but if the leveraged buyout offers a great enough premium then they'll normally find enough willing sellers.
Who gives a rats ass what Carl Icahn thinks? Stop paying so much damn attention to him.
You're leaving me the impression that what he is saying is actually applicable. If it is, get to the point. Otherwise, move on....this story is getting old.
Look at the definition of capitalism "an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state."
Nowhere in the definition does it state that a capitalist must be a greedy ahole who destroys companies and the lives of employees in order to fill his own pockets.
Sadly, we see too many examples of this, but it isn't capitalism, and we need a better label for it, or we risk throwing the baby out with the bath water.
Capitalism gives people the ability to be driven by generally selfish factors, but there is a line between selfish motivation and greed.
Unfortunately that line is more of a moral one which can make it harder to define.