The Predators’ Ball

by Connie Bruck

  Alfred Kingsley also came from Gruntal to the new Icahn and Company, as an associate. Kingsley, seven years younger than Icahn, had started as an undergraduate at Wharton at sixteen, had graduated from New York University Law School at twenty-three and then had gotten his master’s in tax law. In 1965, still in law school, he had begun working full time for Icahn at Gruntal.

  At Icahn and Company both Icahn and Kingsley began mixing arbitrage with options. What they were practicing then was not risk arbitrage—where one buys the securities of a target company after a deal is announced, betting on the transaction’s going through—but classic arbitrage. Icahn would buy a convertible bond at 100, convertible to ten shares of stock at 10, and then he would simultaneously sell ten shares short at ten and one eighth—thus locking in the eighth-of-a-point profit on each share. Then he introduced options into the mix, in elaborate hedging formulas that left him protected on the downside with the potential for an enormous upside.

  “There were great opportunities to make money,” Icahn said, recalling a particularly gratifying transaction in Polaroid where a combination of buying stock, puts and calls brought him $1.5 million for what he insists was “no risk.” “The arbs didn’t know options, and the options brokers certainly didn’t understand arbitrage. The arbs kept arbitrage very quiet in those days, there were only a few doing it, like Gus Levy at Goldman, Sachs. So when I put together arbitrage with options it was really great.

  “Always, I looked for a spot that was not too popular. You want to be in something other people don’t see—and which makes eminent sense.”

  In 1973 the Chicago Board Options Exchange opened, and the field soon became too crowded for Icahn’s taste. Kingsley, meanwhile, had been hedging capitalizations of various companies, which he described as “constantly molding a position. It was like a washing machine, going round and round. I’d look at the whole ITT mess [of varying securities], and I’d say, I could buy this preferred, short that [security], and I’ll he hedged. And then the next day I’d buy some other issue, sell against that. Round and round. It was driving me crazy, and I started getting really bored.”

  Kingsley said it was boredom that drove him from Icahn and Company in 1973 and led him to a small firm named F. L. Salomon, to specialize in new issues. One longtime associate of Kingsley disputed that explanation, saying Kingsley left because Icahn was “paying him spit.” Icahn is notoriously tight-fisted. It seems to pain him to give another dollar. Even in later years, after he had made over $100 million, he groused when his team of investment bankers, working until 2 A.M., ordered steaks from Smith and Wollensky’s restaurant. Law firms that did work for him would often wait months to be paid.

  Another of Kingsley’s associates said he was disappointed at not having been made a partner in Icahn and Company, But by this time Icahn was shedding partners, not making them. He was already notorious for his sudden rages, and for the abuse he heaped upon employees, minority partners, outside lawyers. No one was exempt. Kaminer left, then Goldsmith left (although he said Icahn offered to increase his equity share if he remained). Freilich was later reduced to his one percent. Even Schnall was relieved of his stake.

  Schnall had not been admitted to an exclusive beach club in Southampton, Long Island, and he decided to leave New York, changing his whole social circle (which summered in Southampton), and move to New Canaan, Connecticut. Icahn suggested that it might be a good time for him to take his money out, since Wall Street was in the doldrums and Schnall was nervous; but he asked Schnall to leave his bonds there. Schnall agreed, and continues to receive what Icahn calls his “allowance” of $100,000 a year. To this day Schnall chafes at having agreed to give back his 20 percent.

  Kingsley, meanwhile, was finding the world outside Icahn and Company inhospitable. F. L. Salomon went out of business; Kingsley joined another firm, and it soon merged with yet another. “Every three weeks,” he says, “there was another name on the door.”

  If acumen were the only determinant, Kingsley certainly should have thrived on Wall Street. Jeffrey Steiner, who assisted Nelson Peltz and would become one of Icahn’s principal investors in the eighties, called Kingsley “the most clever business analyst I have ever met in thirty years in business.” But Kingsley, a short, rotund Buddy Hackett look-alike, an Orthodox Jew who leaves work early on Friday so as to be home for the Sabbath before sundown, did not fit—nor did he aspire to—in the white-shoe investment-banking world. And life in the bottom-tier firms that were struggling for survival in Wall Street in 1974 had little to recommend it. In 1975, Kingsley returned to Icahn and Company after less than two years away.

  Even while he was away, Kingsley had continued to talk to Icahn. In one of their conversations he had mentioned that he thought there were great investments to be made in “undervalued situations.” The one he recommended was a closed-end mutual fund named Highland. Kingsley bought some of its shares for his customers, Icahn bought some, and after Kingsley rejoined Icahn they accumulated a block of about 30 percent—which management (distinct from the company) then bought back in 1976. “It was a two-year play, it took us a lot of time to accumulate,” Kingsley recalled. “But we bought at two and we sold at six.”

  That was the beginning. After that, they accumulated positions of 4.9 percent (at 5 percent a shareholder must file a 13D disclosure document with the SEC) in several more closed-end funds at discounts to their real value, the stock prices then went up, and they made a profit. Because these were mutual funds, all one had to do to determine whether they were undervalued was to compute the value of their portfolio and compare that to its stock price. “That was the chicken way of playing,” said Kingsley, comparing it to the task of targeting a company, whose value is harder to quantify. “And after we’d done those, Carl said, ‘This is an interesting way to invest—let’s do some more.’ ”

  In 1978 Icahn waged a proxy fight to gain control of a real-estate investment trust named Baird and Warner. Like Milken, who had been investing in REIT paper through the midseventies, Icahn recognized that there was a lot of hidden value in the depressed REIT industry. And Baird and Warner was not a troubled REIT, just one whose stock price had suffered because of the REITs’ general disrepute.

  While Baird and Warner’s assets were mainly illiquid at that time, they were worth about $30 million—a nice pool of capital for Icahn to control. Icahn renamed this REIT Bayswater, after his childhood neighborhood, and eventually caused it to revoke its status as a REIT, in order to invest in new types of real-estate-related activities and also in the securities of public companies. Bayswater thus became a vehicle for raids.

  The proxy fight—a campaign for the shareholder vote held at a public company’s annual meeting—now became Icahn’s weapon of choice. In the 1950s, proxy fights had been waged by outsiders, such as Robert Young at New York Central Railroad, to persuade stockholders to throw out incumbent managements and install them instead. At that time, however, the advantage lay with the incumbents; as long as management was paying a dividend and was not tinged with scandal, stockholders would rarely vote for a raider.

  By 1979, the odds had changed. Forbes magazine reported that a check of twenty-five proxy actions taken that year showed management the victor in twelve and dissidents in thirteen. Icahn and others had started a new-wave proxy fight, in which the aim was not so much to replace management (although Icahn had done this at Baird and Warner) as to attract the attention of third parties to an undervalued company. And the issues in the proxy fight were framed in terms of shareholder profits. Icahn would point out that the stock was trading at some paltry fraction of book value, and that there was real potential for better earnings.

  In 1979 Icahn won a proxy fight to gain board seats and then forced the sale of Tappan, the stove-maker—whose stock was trading at around 8 and had a book value of over $20 a share—to AB Electrolux, a Swedish-owned home-appliance manufacturer, at a price that gave Icahn a profit of close to $3 million. “Tappan worked like a charm f
or Carl,” said his lawyer for that deal, Morris Orens of Olshan Grundman and Frome. “It clearly demonstrated that if you are right about the company’s assets being undervalued, and the company wishes to put itself up for sale, there will be buyers out there.”

  Icahn was ebullient. Discussing proxy fights aimed at forcing a sellout, he told Forbes, “I think the risk-reward ratios there are a very exciting thing. Much better than arbitrage. It’s the wave of the future.”

  Icahn moved on to Saxon Industries, the copier company, where after threatening a proxy fight he sold back his 9.5 percent stake to the company at a premium over the market, making a $2 million profit. It was his first public greenmailing—selling back to a company at a higher price than was available to other shareholders. But the word “greenmail” had not yet been coined. The activity—which had been carried out by others such as Victor Posner and Saul Steinberg—was known as a “buyback at a premium” or a “bon voyage bonus.”

  Now that Icahn was launched into this new game, it was time for him to divest himself of his last meaningful partner, Fred Sullivan. From now on he would accept investors in his deals, but would share equity with no one (except Freilich, with his one percent). Fred Sullivan, the CEO of Walter Kidde, a small fire-extinguisher company that he had built into a major conglomerate, had met Icahn when Carl was a trainee at Dreyfus, and Icahn had become Sullivan’s broker. In the early seventies, Kidde had invested in Icahn and Company and owned approximately 19 percent. “We sold back about one year after Tappan, at a profit for Kidde shareholders,” recalled Sullivan. “Carl wanted to buy it back.”

  Asked whether he felt he had any choice, Sullivan replied, “Well, he could have just put it [the profits] all in another entity if we had refused. Carl is very clever. And we decided not to test him.”

  On Icahn’s modus operandi in those early raids, Sullivan remarked, “Carl didn’t have the money to finish the deal. He genuinely thought that the price of the stock was undervalued, and he genuinely thought that the values could be realized. He bought on that basis. It was only later, when greenmail started to be excoriated, that he defended it on the grounds that these companies were poorly managed.”

  And when Icahn descended upon his adversaries, the chief executive officers of his target companies, he must have seemed like a nightmare come suddenly to life. After Saxon, Icahn’s next target was the Hammermill Paper Company. “Here’s this poor guy from Hammermill [Albert Duval, its CEO], a real Ivy League guy,” said Sullivan, “and he’s sitting there thinking that the world works the way it always has, with his golf club and his graduating class, and he never raises his voice—and all of a sudden, he’s got Carl, who is such a fighter. It’s terrible. Carl was a scourge in those days.

  “Carl is a dedicated capitalist. He is dedicated to amassing capital. He decided that he wanted to make money. Now, a lot of us made that decision, but few are as dedicated to it as Carl.”

  Seven years after Icahn appeared on his threshold owning approximately 9 percent of the company’s stock, Duval spoke of him with a bitterness which made it seem like yesterday. “I formed the opinion that this was not for us, in the first few minutes of my meeting with Carl,” Duval declared.

  Asked what it was that was so quickly decisive, Duval replied, “He said he wanted to piece off the company. He said, ‘I’m only in this for the money. I don’t know anything about the paper business. I don’t care anything about the paper business. All I care about is the money, and I want it quick.’ ” Duval added, however, that Icahn did not ask explicitly to be bought out. Had he done so, that could have hurt him later in a proxy contest, as the company could have used it against him to discredit all his claims of wanting to increase the company’s value—and expose him instead as someone who had asked for greenmail. (“Everyone knew who Carl Icahn was in those days,” explained one securities lawyer. “When you’re a greenmailer, you don’t have to ask for greenmail.”)

  “He said he wanted to get on the board,” Duval continued. “He wanted to force it [the company] to a merger. He said repeatedly that he had no interest in the paper business. Well, everybody that worked there did. As far as we were concerned, the company had a future as well as a past and a present—but Carl just wanted to parcel it out as fast as he could.

  “I’m sure if I had said, ‘Here’s your money, at a price over market,’ he’d have taken it right then,” Duval added. Instead, Duval—with the help of takeover lawyer Joe Flom from Skadden, Arps—instituted anti-takeover measures, mounted his own proxy campaign, and sued Icahn, charging him with disclosure violations and fraud. Icahn filed a counterclaim, alleging violations in Hammermill’s solicitation of proxies.

  One of Duval’s lawyers said, “Duval called Icahn’s bluff. He said, ‘I’m not putting you on the board, I’m not buying you out, I’m not selling the company right now.’ Icahn was a known quantity at that point. He was someone who had about ten to twenty million at his disposal. You didn’t have to worry that he’d make a tender offer for the company—he didn’t have the money. At ten or eleven percent of the company’s stock, he was tapped out.”

  One of Icahn’s lawyers confirmed that Icahn was stretched to his limit in each of these early deals. “He was really a gambler—everything he had was in each of these deals. Each one got bigger, because he would plow the profits from the one before back in. And the leverage was enormous—so a loss would have been devastating.”

  Icahn narrowly lost the Hammermill proxy contest. To make matters worse, it was discovered that he had voted about seventy thousand shares that he had borrowed, and then returned, after voting day. Icahn’s defense was that he had been buying stock through the days just preceding the election and was afraid that not all of it would clear in time for him to vote it, so he had borrowed some in order to be sure he had the full voting benefit of what he owned.

  Duval met Icahn in a hotel room in Erie, Pennsylvania, where Hammermill is located, not long after the voting of the borrowed shares had been discovered. Icahn had lost the contest, the company was not offering to buy him out at a premium, but he was sitting there with close to 10 percent of the company’s stock—and settlement talks were at an impasse. “I used a lot of vulgar language,” Duval recalled. “I said, ‘You’re the damnedest liar and cheat I know. We’re going to take out a full-page ad in The Wall Street Journal and The New York Times that says, “Icahn Cheats.” ’

  “I walked to the elevator, and he followed me and said, ‘Please, come back, we’ll talk.’ ” Duval is convinced that it was that meeting—and that threat—that broke the impasse, since not long after that, at the end of July 1980, they were finally able to reach settlement terms. For the next year, Icahn was prohibited from engaging in a proxy contest with Hammermill, and he granted Hammermill a right of first refusal on the shares owned by the Icahn group; Hammermill paid Icahn $750,000 for his expenses.

  Through the next year, Icahn mounted no raids. According to one former insider, he was “stymied,” because most of his capital was tied up. He and his investors had invested about $10.6 million in Hammermill stock. Then, when the standstill expired after a year, Hammermill bought him out at a premium. The price of the stock had risen considerably in the past year. Icahn made a profit of about $9 million over his initial investment.

  Someone else might have been tempted to sell back without a premium after the debacle of the proxy contest, in order to free up all his funds. But, as one lawyer who has been opposite Icahn on a number of his forays pointed out, “Icahn’s style in 1980 was a whole lot of bluff and bluster. His game was, ‘I will not be bluffed out.’ For him to have sold out at market, after losing the proxy contest, he viewed—I believe—as a signal to the next ten CEOs: Fight the proxy fight, beat him, and he’ll go away.

  “In those days he never made any pretense to doing something socially beneficial. The Carl Icahn of 1980 was still trying to figure out how this game was played, and what he could get away with.”

  For Icahn,
the lawyer added, the game never became personalized. Icahn would make whatever attacks on management seemed to be required to win a proxy fight, and he understood that his opponents would unleash their armaments on him—but he seemed surprised when he saw how personal was his targets’ animus for him. “If Carl had his druthers, these fights would have been like two gentlemen dueling—you take your best pokes, but when it’s over why not go out and have a beer together?”

  His targets, however, tended not to see Icahn’s game as sporting. “People don’t like to be challenged,” this lawyer commented. “Particularly kings in their own castles.”

  IN EARLY 1982, Icahn led a raid on the huge retailer Marshall Field that established him as a serious predator. He surfaced, as was his habit, with a little over 10 percent of the company’s stock. But one day later Icahn and his group reported that they owned 14.3 percent. One week after that, they filed at 19.4 percent.

  What had happened was that additional investors—including British financier Alan Clore, and Marvin Warner, then chairman of the Cincinnati-based Home State Savings Bank—had jumped on the Icahn bandwagon. After his group had acquired nearly 20 percent of the stock, Icahn executed a loan agreement for $20 million with Jeffrey Steiner on behalf of a small bank Steiner controlled in Paris, Banque Commerciale Privée. Under the margin rules (which allow one to borrow up to 50 percent of the purchase price of the stock), this would have enabled Icahn to buy $40 million of stock.

  Marshall Field fought back with a lawsuit as Hammermill had, making the usual battery of allegations about violations of federal securities laws, but added something novel as well: a RICO (Racketeer Influenced and Corrupt Organizations Act) count, usually reserved for dealing with organized crime. It charged Icahn with having invested income derived from a “pattern of racketeering” to acquire his interest in Marshall Field, whose activities affected interstate and foreign commerce.