When the Wolves Bite

by Scott Wapner

  The point was clear—Icahn may have despised Ackman, but he wasn’t about to risk losing a boatload of money just to prove it. It was a lesson Icahn had learned from more than fifty years on Wall Street in a career that, ironically, almost never happened.

  Carl Celian Icahn was born on February 16, 1936, in Brooklyn, New York, the only child of Bella, a school teacher, and Michael, a cantor at the local synagogue. The family moved to the Bayswater section of Queens when Icahn was young, near Far Rockaway, a scruffy, mostly middle-class neighborhood not far from Kennedy Airport. Icahn was tall for his age, and lanky, liked baseball, and even early on was enterprising in how he made money.

  At thirteen, he started a business making photographic matchbooks using a makeshift darkroom he’d set up in the family basement.

  “I had a little camera to take pictures of people’s homes. I would go knock on the door and go ‘Mrs. Walker, Mrs. Walker I’ll give you 150 matchbooks with a picture of your house.’… So then I’d take a picture of this guy’s house to the darkroom and write the name on the picture. I’d get a buck fifty for the matchbooks I bought for a penny. I got to the point where I had three kids working for me.”

  Icahn would soon graduate to more lucrative endeavors.

  During the summer after his senior year at Far Rockaway High School, Icahn worked as a cabana boy at Lido Beach on Long Island, often taking money off the leathered and more senior clientele during the Oceanside poker games. He was good with numbers, had a nearly photographic memory, and made thousands of dollars playing cards by the beach.

  “I was a pretty good poker player,” he said, with a hint of immodesty. He “made a lot of money.”

  Even then, Icahn loved a score and hated being crossed or taken advantage of.

  “I had a temper,” he told the New Yorker’s Ken Auletta in a 2006 profile. “I sometimes scare myself I’m so obsessive. If I go over a certain line, I’m like another person.”6

  He was also fiercely intelligent.

  Icahn was the first graduate of local Far Rockaway High to attend Princeton, paying part of his tuition with the poker loot he’d won in Lido. He majored in philosophy, displaying the quick wit and deep thinking that would serve him well later.

  “He was able to analyze a subject and come up with his own unique conclusion,” said Peter S. Lieber, Icahn’s roommate during his junior and senior years. “I think it presaged what he would do in the future.”

  Icahn spent hours in the library on his senior thesis, which was nothing short of a mouthful. Icahn called it “An Explication of the Empiricist Criterion of Meaning,” winning top honors in Princeton’s prestigious philosophy department.

  “There was a special prize for the best senior thesis, and Carl certainly deserved it and won it,” said Lieber.

  Icahn graduated from Princeton in 1957 and, somewhat reluctantly, enrolled in New York University’s Medical School to follow his mother’s wishes. Icahn lasted a little more than two years before abruptly quitting.

  “I really hated it,” he said while recounting a story about his travails. “I quit twice and went back. And the third time I was reading a little about Tuberculosis, and I go to the Tuberculosis ward, and this doctor tells me go give me a diagnosis, so I go over and I tap this guy’s chest and the guy coughs on me, and I said, I think I’m gonna get TB! The doctor was like, you psycho, you leave now and you are never coming back, which was fine with me. So I walked across the street—I think I’m going to die now anyway so it doesn’t matter—and I go join the Army on 34th Street.”

  Icahn served six months in the Army reserves at Fort Sam Houston in Texas, where he was hardly your typical enlistee, considering it was poker games and not push-ups where he earned his stripes—and thousands of dollars.

  In 1961, Icahn left the service and needed a job.

  He chose the canyons of Wall Street and joined Dreyfus & Company as a broker trainee, getting the job with help from his well-connected uncle, Elliot Schnall, who was a wealthy businessman and had taken a liking to his neophyte nephew. Schnall had gone to Yale and seemed an ideal person for the younger and inexperienced Icahn to emulate. The two remain close to this day, often convening in the late afternoon for a cocktail when Icahn is out East.

  “His uncle Elliot was not only a close family member, but Elliot’s business success was clearly impressive to Carl,” said Lieber, recalling their conversations while at Princeton.

  The job at Dreyfus may have been a fresh start, but the timing was terrible. Icahn joined the firm shortly before the so-called Kennedy Slide began on Wall Street. Stocks were slammed for six straight months, and by the time the crash was over, the market had fallen 22 percent, including a 40 percent nosedive on a single day in the spring of 1962.7

  Icahn lost everything, including his beloved Ford Galaxie convertible. Needless to say, Icahn’s parents were less than pleased that their son, who’d already given up on being a doctor, was now financially in ruins.

  “I lost everything. I was broke. I had nothing and I sold the car so I could live. And my mother said, ‘You can’t live at home—you can’t go back to the house unless you go back to medical school again.’ So I wasn’t going to do that and so I rented an extremely small and cheap apartment with absolutely no view.”

  With his professional life in tatters after the ’62 crash, Icahn joined Tessel, Patrick & Company, where he toiled in the options market.

  Icahn mastered the arcane trading form, which was just like buying and selling stocks, only with a wrinkle. Options were often cheaper to own than stocks, but they were more speculative, since traders were essentially betting on the future price of a security rather than where it was at that moment. If the security in question hit the desired price by a specific date, the investor could win big, but if it didn’t, losses could be steep. Icahn proved a deft risk manager and a year later joined Gruntal & Company, where he ran the entire options department.8

  “He was quite bright, and very aggressive, which isn’t a bad combination in this business,” Icahn’s former Gruntal colleague Howard Silverman told the New York Times in 1985.9 Icahn was a perfect fit. His investing acumen and skill with numbers helped him excel in the volatile derivatives market.

  Icahn was now making more money than he ever had, but longed to open his own shop. There was only one problem—he didn’t have the money to do it. Luckily, he knew someone who did. Icahn turned to his wealthy Uncle Elliot for help. Schnall agreed to lend his nephew $400,000 for a coveted seat on the New York Stock Exchange, and in 1968, Icahn & Company opened for business on Broadway in Lower Manhattan.

  In return, Schnall received 20 percent of the shares in the firm. Icahn was grateful.

  “He was more like a best friend than an uncle,” Icahn said of Schnall. “He was a great guy and he loaned me the $400,000 based on the fact that I would put up every penny of my net worth, which at that point was $150,000. His accountant advised me not to do it, but I didn’t think twice. Somehow I knew I’d make it.”

  With the stock market still cooking during the decade’s bull market, Icahn and a younger associate named Alfred D. Kingsley, whom he’d met at Gruntal and taken with him, hit the ground running. Kingsley had gone to Wharton at sixteen, had a master’s degree in tax from New York University, and was a numbers whiz.10 Icahn was a workhorse, keeping long hours and sometimes sleeping at the office to reach prospective clients early in the morning in time zones far from New York.

  The two men also began dealing in the high-stakes game of arbitrage, a fancy Wall Street term that describes how investors buy securities like stocks or bonds in one market and sell them in another, pocketing the difference. At first, they dealt in closed-end mutual funds.

  In a letter to prospective investors, the men laid out their hard-nosed strategy: “It is our contention that sizable 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 ma
nagement to liquidate or sell the company to a ‘white knight.’ b) waging a proxy contest. c) making a tender offer. d) selling back our position to the company.”11

  Coined the “Icahn Manifesto” by the biographer Mark Stevens, the credo would prove to be an overwhelming success.

  “I made a fortune,” Icahn said. “I was up to making a million or two a year based on risk-less arbitrage which for some reason very few brokers at that time understood.”

  The kid from Queens had arrived. But the good times on Wall Street wouldn’t last.

  Between January 1973 and December of 1974, the Dow Jones Industrial Average lost 45 percent of its value. Billions of dollars in market cap were wiped out during the slide, which helped throw the United States’s economy into a deep recession. The oil market was unsettled following OPEC’s embargo, and then in the summer of 1974, the final blow—the resignation of President Richard M. Nixon following the Watergate scandal.

  The period would go down as one of the worst bear markets in American history.

  While others were picking up the pieces from the crash, Icahn and Kingsley found an opportunity. As documented in the book Deep Value by Tobias Carlisle, the two men began identifying undervalued stocks whose assets had a higher underlying value than they were trading for as a result of the sudden dislocation in the markets.

  “We asked ourselves, ‘If we can be activists in an undervalued closed-end mutual fund, why can’t we be activists in a corporation with undervalued assets?’” Kingsley said at the time.12

  So, Icahn turned arbitrage into an art, taking what he had learned dealing in stocks and bonds and turning to the companies themselves. Corporate takeovers were becoming the modus operandi for large and liquid investors, and Icahn was just beginning to broaden his shoulders. He wanted a piece of the action.

  In 1977, in his first major foray into the takeover game, Icahn bought a 5 percent stake in the family-run appliance maker Tappan.13 The Ohio-based company, founded in the 1880s, made ovens and stoves. Icahn bought the stock when it was near $8 per share, arguing that it was undervalued and that the company should sell itself. He launched a proxy fight for a seat on the company’s board, which immediately put him at odds with Richard Tappan, the chairman of the company and grandson of its founder.14

  “I wasn’t going to let Icahn walk in and sell piecemeal an enterprise my family had spent their lives building,” said Tappan in the book The Titans of Takeover by Robert Slater.15

  Not by choice, anyway. Tappan would soon feel the force of the emerging antagonist. Icahn won the proxy contest and convinced Tappan’s board to sell the company, which it ultimately did to the Swedish firm AB Electrolux for $18 per share, more than double what Icahn had paid for his stock.16

  Icahn’s initial investment of $1.4 million turned into a $2.7 million profit.17

  He also gained an unlikely future ally in the process—Richard Tappan himself—who was so taken by Icahn’s negotiating abilities that he’d join his one-time adversary in several future deals.18

  But while Icahn was a burgeoning success in his new career and was well on his way to making billions on Wall Street, he found little appreciation for his newfound status back home. Icahn’s mother had been heartbroken when he quit medical school, and he was never close to his father, who didn’t quite understand what his son did for a living or how—only that he’d given away a chance to be a doctor.

  To this day, the man who has made a living knocking heads with some of America’s most iconic companies nearly tears up when recounting his relationship with his late father.

  “Thinking about this makes me cry because we were never that close,” Icahn said, his voice growing ever softer while speaking. “Then in the seventies—we had never discussed what I did—he comes up with a pencil, and he was terrible with numbers, but comes over with a pad, and he says, ‘Come here, come here, son, write it down and tell me how you do it.’ I said, ‘You finally admit it.’ He said, ‘Yeah’ and we hugged. I still cry every time I think about it.”

  Icahn’s genius was in full force. He even figured out a way to make money when big deals didn’t go his way.

  In 1980, Icahn targeted the New York paper company Saxon Industries, buying more than seven hundred thousand shares for an average price of $7.21.19 Icahn threatened a proxy fight, or a shareholder vote, for a seat on the company’s board. While Saxon initially talked tough, the company settled after only six months and agreed to buy back Icahn’s stock for $10.50 a share, more than three dollars above Icahn’s average purchase price.20

  Icahn made $2.2 million on the deal, and the scores kept coming.21

  Icahn pocketed $10 million in a deal with Hammermill Paper the same year, $7 million from Simplicity Pattern in 1981, and $17 million on an investment in the storied department store chain Marshall Fields the following year.22

  By the mid-1980s, Icahn had become a player on Wall Street’s emerging takeover scene alongside the day’s other dealmakers, such as Ivan F. Boesky, T. Boone Pickens, and Michael Milken, the Drexel Burnham Lambert banker whose infamous “junk bonds” helped finance the buying frenzy of the times. Milken’s high-yielding securities had earned him the nickname “The Junk Bond King” since he had all but invented the market for the securities.

  The men—coined corporate raiders by the media—were shrewd, often ruthless negotiators, stopping at nothing to shake up companies whose CEOs were deemed either too “imperial” or too “country-club,” more interested in their golf scores than their shareholders. It was the era of the leveraged buyout (LBO), a time when deep-pocketed dealmakers like Icahn and others ran roughshod through the nation’s boardrooms and there was little anyone could do to stop them. Milken’s bonds were cheap, easy to access, and gave financiers a newfound power—power they were more than willing to exert.

  On September 19, 1983, Icahn barreled into the railcar maker American Car and Foundry, or ACF, with an eighty-one-page filing with the Securities and Exchange Commission that immediately put the company on notice.23 Icahn had amassed a 13.5 percent stake in the company and wanted control. He demanded a meeting with management, threatening to turn up the heat if they didn’t come to the table willingly. Icahn continued to buy ACF stock in the meantime, and by December his stake had grown to 27.2 percent, only increasing his leverage.24

  Early in 1984, Icahn pounced, buying the company outright for $469 million through an LBO. Icahn immediately sold off assets, including the company’s expansive New York City offices when he couldn’t figure out what the employees actually did there.

  He later laughingly told of his adventures with the ACF investment and the real-estate enigma he had encountered in New York City.

  “They’ve got 12 floors on 3rd Avenue… I spend the whole day, look at my yellow pad, can’t figure out what the hell they do,” Icahn recounted during an interview at a New York Times event years later. “I go back the next day, seventh floor, ninth floor, eighth floor, I say, I’m not an idiot, I can’t figure out what they do. It’s razzle dazzle. They say this is very arcane. I say, I want to go to St. Louis. I want to see the guy who is the Chief Operating Officer. Over martinis, I ask, how many of those guys in New York do you need to support your operation, because I honestly can’t figure out what to do. [I] got rid of the whole 12 floors, sold the lease for $10 million. That was a lot then.”25

  Icahn became chairman, cutting even more costs. As a result, ACF’s earnings soared, winning Icahn back his initial investment and then some.

  Also in 1984, Icahn targeted Chesebrough-Ponds Inc., which had units in health care, food products, and apparel. Icahn mounted a fervent takeover attempt before the two sides settled on a deal a few months later. Chesebrough agreed to buy back more than a million and a half of Icahn’s shares, scoring him a $68.6 million profit.26

  Icahn then went hunting for even bigger game.

  On February 5, 1985, Icahn attempted an $8.1 billion leveraged buyout of Phillips Petroleum. The company had just fended o
ff another feisty financier, T. Boone Pickens, who’d gone hostile on the company the prior December. Phillips pushed back against the Oklahoma-born oilman, but when it looked like a deal seemed unlikely, it gave Pickens $90 million cash to buy back his shares, along with another $25 million for his expenses.27

  When the stage cleared of Pickens, Icahn moved in.

  He’d bought 5 percent of Phillips stock, declared that shares were undervalued, and proposed taking the company private through an $8.1 billion buyout. Icahn and Phillips battled for months and then, just like with Pickens, the two sides ultimately settled. Icahn agreed not to target the company for another eight years, and in return Phillips bought back his shares for a $52 million profit and gave another $25 million to cover his expenses.

  Shareholders overwhelmingly approved the deal and hailed it as a monumental win.

  “It’s the single biggest victory ever won by stockholders on Wall Street because the big financial institutions finally decided they’re not going to take a back seat,” said large Phillips shareholder Irwin L. Jacobs.28

  ‘‘He got a better deal for everybody; he’s entitled to it,’’ a trader said in the same New York Times article, discussing the deal Icahn had cut.

  Others weren’t as complimentary.

  Critics began branding the exploits of Icahn, Pickens, and other big investors as “greenmail,” likening the practice to a form of corporate extortion. Icahn angrily rejected the label, arguing that although he was motivated to make money, his efforts were akin to a night watchman keeping unscrupulous or lazy boards in check.

  “They have tremendous bonuses, lavish offices, private dining rooms, jet planes and country-club memberships while the companies are falling apart,” he said of directors during a 1985 news conference.29

  No matter what critics thought, Icahn was proving himself a winner.

  But in the summer of 1985, Icahn’s takeover chops would be put to the test. In June, he targeted Trans World Airlines, the iconic but struggling carrier once owned by the legendary recluse Howard Hughes. TWA hadn’t turned a profit since the 1960s, and by the time Icahn arrived on the scene, the St. Louis–based legacy liner was vulnerable. Icahn had bought 25 percent of the stock, then bid $18 a share for the company in a deal valued at $1.8 billion.30