When the Wolves Bite

by Scott Wapner

  TWA launched an all-out PR assault, running a full-page “Open Letter to Carl Icahn” in major newspapers around the country, making it clear it wasn’t interested in a deal or the financier.

  “If you thought we’d just stand by and do nothing while you try to take over our company, think again!” the hard-hitting ads read.31

  TWA wanted a different deal—with a different person—and thought it had found its white knight in aviation industry pioneer Frank Lorenzo. Lorenzo’s Texas Air Corporation bid $793.5 million for TWA, giving Icahn an immediate paper profit of $50 million through the stock he owned.32

  The windfall was tasty, but Icahn had no intention of going away that quietly. He raised his bid. And when TWA’s unions became skeptical of Lorenzo, the board backed Icahn instead, and the airline was his.

  “We’ve got ourselves an airline! We’ve got ourselves an airline!” Icahn was reported to have said when the deal became official, wearing a pilot’s jacket in his offices.33

  TWA’s rank and file were slightly less enthused.

  Upset over Icahn’s deep cost-cutting plans, four thousand flight attendants staged a ten-week walkout while wearing “Stop Carl Icahn” buttons. The work stoppage left the airline bare during a key travel season. Traffic suffered, and TWA had to borrow millions to keep operations going, which only increased its already heavy debt load.

  Icahn didn’t back down.

  He pushed for TWA to grow its footprint and become more competitive with rivals. In 1986, he struck a deal with Ozark Airlines to acquire dozens of its planes and routes. Icahn’s plan was to merge them through the Midwest with TWA’s perfectly positioned hub in St. Louis.34

  And he didn’t stop there.

  On July 22, 1987, Icahn went back to his playbook, announcing plans to take TWA private through a Drexel-led LBO valued at $1.2 billion.35

  The deal was approved in 1988, and Icahn made $469 million, nearly $30 million more than he had paid for the airline in the first place. He also got control of 90 percent of TWA’s outstanding shares. For its part, TWA got more than $500 million added to its debt load.36

  Icahn continued to slash costs, canceling prior orders for dozens of new jets.

  He sold TWA’s lucrative London routes to American Airlines for $445 million, and early on, it looked like Icahn had the magic touch.37

  After losing $193 million in 1985 and $106.3 million in 1986, TWA turned a profit in 1987 and 1988 as Icahn earned praise for orchestrating the airline’s turnaround. It was a heavy lift, for sure, with some wondering why he’d even bothered getting his hands dirty in the first place.

  Icahn said it was simple.

  “I could have gotten out,” he told the New York Times in 1986. “But I’m brought up in the Wall Street tradition. You make a deal and you stick with it.”38

  The good times were short-lived.

  TWA’s debt pile—heightened by the LBO—became insurmountable, and on February 1, 1992, the airline filed for Chapter 11 bankruptcy protection.

  Icahn had a much more fruitful outcome.

  As one of the top creditors, Icahn stood first in line to reap any profits from the sale of assets. He also cut what became known as the Karabu Ticket Agreement. It was an eight-year deal that let Icahn buy any ticket that connected through St. Louis for 55 cents on the dollar, with the ability to resell them at a discount.39 It was a shrewd deal that helped solidify Icahn’s reputation as the day’s most formidable, if not feared, dealmaker.

  “To the Raided, He’s Icahn the Terror,” screamed a headline in the New York Times during the period.

  But by the mid-eighties, the dealmaking landscape was changing. Greenmail was under fire, and so too were some of the investors themselves. In 1986, Icahn admitted he was questioned as part of a broader investigation into insider trading that had also ensnared the arbitrageur Boesky and Drexel’s Milken.40

  Icahn was never named or charged in the case.

  “No allegations have been made against me by the Securities and Exchange Commission and I have no reason to believe that any will be made in the future,” Icahn said in November of that year.41

  Boesky and Milken were less fortunate.

  On November 14, 1986, Boesky plead guilty to insider trading and was sentenced to three and a half years in prison. He also agreed to testify against Milken, who was later indicted on six felony counts related to insider trading.42 Milken also pled guilty, and on November 12, 1990, he was sentenced to ten years at the Federal Correctional Institution in Pleasanton, California, outside San Francisco.43

  Drexel, the firm that had financed the decade’s deluge of deals, soon met a similar demise. On February 13, 1990, the company filed for bankruptcy, a stunning end for what was then the nation’s fifth-largest investment bank.44

  In the wake of the crackdown and the change in public sentiment, Icahn began to change his own tactics. In 1988, he’d bought nearly 15 percent of Texaco and pushed for a takeover at $60 per share, or $12 billion.45 Icahn also went back to his playbook, waging a proxy fight for five seats on Texaco’s board of directors, and though he’d eventually lose, Icahn continued to buy shares and got the company to pay shareholders a special dividend rather than buy back his stock. It was a win-win, and in June of 1989, Icahn’s stake in Texaco was worth a staggering $2.2 billion.46

  As the 1990s began, Icahn showed no signs of slowing down. In 1995, Icahn and another investor, Bennett LeBow, bought big stakes in RJR Nabisco. It was Icahn’s first of several attempts at the company that was infamous for being the center of the classic business story The Barbarians at the Gate. Icahn argued for a split of the company’s food business, and though he’d ultimately lose a proxy contest, he made more than $130 million in profits when he sold his shares.

  In 1999, Icahn was back with a new stake and the same calls for Nabisco to spin off its food unit. The company eventually agreed to a spin-off—just with its tobacco arm instead. Icahn sold again, with another $130 million in profits.

  Icahn wasn’t finished. He bought the stock again, making an additional $589 million when RJR finally sold the food division in 2000 to Philip Morris Cos. for $9.8 billion. Icahn emerged from the deal with a saying he still stands by and often repeats when recounting his many boardroom battles: “I fight with them. I’m friends with them. There’s war and there’s peace.”47

  And often, there’s a lot of money.

  By 2000, Icahn’s net worth was estimated at more than $4.2 billion.48 He owned a thirty-eight-acre estate in Bedford, New York, a silver Rolls-Royce, and other spoils worthy of his status as one of Wall Street’s last standing titans.49

  He began to reinvent himself, shedding the “raider” moniker that some had tagged him with in the eighties for the more civilized-sounding “shareholder activist.” Icahn was also about to expand his exploits as a money manager.

  In 2004, Icahn raised $3 billion from investors, a huge amount of money at the time, and started a hedge fund he called Icahn Partners.50 It was hardly your typical hedge fund, but then again, Icahn was hardly your typical investor. According to the proposal sent to prospective investors, Icahn had generated annual returns of between 48 percent and 53 percent since 1990—astronomical by any standard. If investors wanted a piece of that action, they were told they’d have to pay up, and handsomely. $25 million was the minimum buy-in, and rather than the standard 1 percent or 2 percent in management fees that other funds were charging their investors, Icahn charged 2.5 percent. He also charged 25 percent of the net annual profits rather than the 20 percent that was the industry standard.51

  Not surprisingly, Icahn had no problem raising the money for the fund.52

  Icahn’s war chest allowed him to think even bigger. On September 18, 2004, he began to show just how big. That day, Icahn revealed an 8.9 percent stake in the drug maker Mylan Pharmaceuticals, which was in the midst of a nasty takeover battle with rival King. Icahn had other plans for the company and offered $5.4 billion to take over Mylan outright. Icahn st
ood to score no matter what. He’d already pushed Mylan shares higher when he entered the scene and would profit even if the deal with King fell through. He’d also shorted King shares in the process, protecting himself even if the deal was canceled.53 In July 2005, Mylan said it would buy back 94 percent of Icahn’s stake at a hefty profit.

  Later that year, Icahn went after Time Warner, the $85 billion media company that had had an ill-fated merger with AOL in 2000 during the last days of the dot-com bubble. Icahn owned thirteen million shares, good for a 2.6 percent stake, and had an audacious plan: he wanted Time Warner to split into four companies and buy back $20 billion worth of stock.54

  It didn’t take long for the relationship to grow contentious.

  Icahn launched a proxy fight, asking shareholders to get rid of the company’s current CEO, Richard D. Parsons, and the company’s board of directors.

  “I enjoy the war,” Icahn told Ken Auletta in 2006 while in the midst of the battle.55 “It’s the greatest game in the world. It’s like a poker game. Take Time Warner. I am on a battlefield against their best top lawyers, thirty P.R. guys are against me, and I’m here. I love being the underdog. Deep down—I know this sounds immodest, but I’m much better than them at this type of thing.”

  On September 12, 2005, Icahn made his case in an SEC filing, saying, “While [Time Warner] management has directed lip service toward these actions and taken an overly deliberate and slow path, we believe it is now time for action.”

  Time Warner resisted the Icahn-led split and on February 17, 2006, the day after Icahn’s seventieth birthday, came to an agreement with the investor. Time Warner would buy back $20 billion in stock, instead of its planned $12.5 billion, and agree to appoint two independent directors to the company’s board.

  Though he’d won the bigger buyback, Icahn knew he’d suffered a setback in the bid to break up the company.

  “Maybe I was a little off on knowing that the big investors did not want to see a complete change on the board,” Icahn told the New York Times. “But I think you’d be hard-pressed to find a shareholder that does not think I created value here.”

  In fact, by 2007 Icahn had increased the market cap of his targeted companies by $50 billion, all within just a couple of years. He’d created wealth for shareholders far and wide—and, of course, for himself.

  In 2008, Icahn was the forty-sixth-richest person in the world according to Forbes, and he aspired to climb even higher. In the year that followed, Icahn would go after Motorola, Yahoo, Biogen, and Clorox, among others, not always winning, but more often than not pushing share prices higher during his many campaigns.

  And while he would never become a doctor as his mother had wished, he would contribute to the medical profession in another way. In November 2012, Icahn announced he was giving $200 million to Mt. Sinai Medical School in Manhattan. The donation would create the Icahn School of Medicine at Mt. Sinai.

  By December 2012, when Herbalife hit Icahn’s radar, he was considered Wall Street’s most intimidating and savvy investor and was worth a reported $20 billion. Icahn’s annualized returns had outpaced Warren Buffett’s over a similar twenty-year period, solidifying his reputation as a true icon of investing.

  Some wondered how Bill Ackman could survive in the ring with such a formidable opponent.

  10

  THE EXIT AND THE PILE-ON

  By the middle of winter 2013, Icahn’s emergence had helped push Herbalife shares back into the high $40s, hardly where Ackman thought they’d be just two months into his public campaign. Nevertheless, he remained steadfast that the story—and the trade—would eventually break his way.

  On one frigid winter evening, it looked like it might.

  On Saturday, February 16 at around 6:20 p.m. New York time, I stood on the darkened and quiet corner of East 65th Street and Park Avenue in Manhattan and broke the news, via an email, that, according to a source, Dan Loeb had started liquidating his Herbalife position. The selling had started a few weeks ago, I said in my report, which made no mention of exactly how many shares Loeb had dumped or the amount that remained in his fund.

  It was surprising news to say the least.

  Just six weeks prior, on January 9, Loeb had declared Herbalife a “compelling long-term investment” for his firm, Third Point, and said in a letter to his investors that “shares could be worth $55 to $68,” representing a major jump from where he’d originally stepped in and bought the stock.1 Now he was suddenly selling?

  To Ackman the move looked like a classic pump and dump scheme, where an investor buys a stock, publicly pushes it up, then sells it soon after for a healthy profit. Loeb laughingly denied that claim months later during an interview with Andrew Ross Sorkin of the New York Times, saying that when Herbalife shares had reached nearly $44, the opportunity to sell was simply too good to pass up.

  “That, for us, was a gift; we decided to take the money and run,” Loeb told Sorkin. “There was no pump and dump.”2

  Three days after my report that Loeb had started selling down his stake, investors once again got a better look under Herbalife’s hood. On Tuesday, February 19, shortly after 5 p.m. Eastern time, the company released its earnings report, which handily beat expectations. More important, the company raised its outlook in a sign of just how strong the business had been performing of late. On the earnings call the following morning, CEO Michael Johnson said as much to the analysts who’d dialed in.

  “As we reported yesterday,” Johnson said, “Herbalife enjoyed broad-based strength around the world. More specifically, in 2012 we achieved the following financial results: a record $4.1 billion in net sales, a record $4.7 billion in volume points, a record $736 million of EBITDA [a key metric of earnings], a record $477 million in net income, and a record $4.05 of Earnings per shares.”3

  Johnson also addressed Ackman, though not by name.

  “Additionally, as noted in our press release,” said Johnson, “our guidance excludes certain one-time costs, mostly legal and advisory services associated with our response to information put forth by a short-seller. The costs are currently expected to be between ten and twenty million dollars.”4

  Johnson also said he’d spoken to Icahn briefly, calling the discussions “short” with “nothing concrete to report.”5 Johnson sounded upbeat as he spoke, confident that, especially with Icahn’s presence, he could outdo Ackman once and for all.

  Two weeks later, investors would learn why Johnson had sounded so optimistic. On February 28, Herbalife announced it would add two new directors to its board, handpicked by Icahn himself. Herbalife also gave the investor the right to increase his stake to 25 percent from his current position of 14 percent.6 The agreement also meant that Icahn would have access to critical information most typical investors wouldn’t, a huge advantage if he ever wanted to buy the company outright.

  “Over its long history, Herbalife has proven its ability to increase revenues and returns, and we will work with the Company to build on its results,” said Icahn in a press release detailing the agreement he’d reached with management. “We conducted considerable research on Herbalife and its business before making our investment in the Company, and have great respect for its Board and management team, and believe in the Company’s great potential. We expect our shareholder representatives to provide positive input into Board decisions affecting the future of the Company.”7

  Johnson heaped his own praise on the deal.

  “We are pleased to have reached this agreement and look forward to working with the Icahn representatives as members of our Board of Directors,” he said. “We appreciate the Icahn Parties’ shared views on the inherent value of Herbalife’s operations, products and future prospects.”

  Herbalife shares popped 7 percent on the news to close the day at $40.29.

  To the experts who covered the stock on Wall Street, Icahn’s board seats were more than simply symbolic.

  “He has a board level opportunity to get some questions answered. Tha
t’s worth something,” said the D.A. Davidson analyst Tim Ramey, who covered the stock closely.8

  The timing of Icahn getting his board seats was fortuitous to say the least, considering that only six weeks later Johnson would be dealing with another public crisis.

  On Tuesday, April 9, one of the “big four” accounting firms, KPMG, abruptly quit as Herbalife’s auditor amid reports that a former senior partner at the firm, Scott London, was being investigated by the FBI for insider trading. KPMG also withdrew three years’ worth of Herbalife’s audited financial reports.

  Two days later, London was charged with conspiracy to commit criminal securities fraud for allegedly giving stock tips to one of his close friends in exchange for cash. The friend, a man named Bryan Shaw, had allegedly made $1.27 million on the illegal trades, with the two men pulling off an operation that sounded straight out of the movies. According to authorities, Shaw had routinely given London bags of cash in secret meetings on a street corner near his house. There were Rolex watches and other expensive pieces of jewelry in addition to concert tickets and cash.

  In a statement, Herbalife defended its accounting practices and its management. Still, the timing of the announcement of KPMG’s abrupt departure and the uncertainty it created was the last thing the company needed. Bad publicity was one thing, but throwing years of Herbalife’s income statements into flux meant the company was essentially frozen financially. It couldn’t borrow money to buy back stock as it hoped since no bank in its right mind would lend to the company without fully audited books.

  To no one’s surprise, Herbalife shares fell 3.8 percent to $36.95 on the day, with even the most bullish analysts suddenly rethinking their positions.

  “This is and will be disruptive to the stock, but hopefully not the company,” said Ramey in a research report detailing why he had downgraded the stock, for the first time ever, upon hearing the news.9