Restless. Aggressive. Controversial.
Carl Icahn may well be the most famous corporate raider of all time.
He first rose to prominence in the 1980s. That’s when he started cutting his teeth as an apex predator, hungry for financial success, willing to push the limits.
What was Icahn’s strategy? Well, first, he would identify a struggling company that was undervalued. Then he would raise the cash (often through heavy loans) to buy a controlling stake.
Once he did this, he would push for change within the company. His favourite tactic was to apply psychological pressure. He would agitate for management restructuring or asset liquidation.
This would allow him to secure capital returns in the form of stock buybacks or special dividends.
Ultimately, once he had unlocked sufficient value, he would simply sell his stake in the company for a profit.
Lather, rinse, repeat.
Source: Image generated by OpenAI’s DALL-E
Yes, Carl Icahn was the equivalent of a chess grandmaster. Always thinking several moves ahead. Very cunning. Very sharp:
- Perhaps his most provocative project happened in 1985. That’s when he set his eyes on Trans World Airlines (TWA).
- At the time, TWA was a major brand name. It was considered one of the ‘Big Four’ domestic airlines in the United States. It had a proud history and a prestigious pedigree.
- Unfortunately, TWA was struggling financially. It was facing rising competition, high operating costs, and a challenging regulatory environment. What was particularly troublesome for the airline was its heavy debt load.
So, naturally enough, Icahn saw the opportunity here. He swooped in. Seized his chance:
- He gained control of TWA through a leveraged buyout. Then he immediately got to work. He started pushing for employee layoffs, as well as the renegotiation of existing contracts. These cost-cutting measures created fierce tension between management, employees, and unions — but Icahn acted like a dictator, bulldozing his way through.
- Soon enough, he began selling off TWA’s planes, shrinking the company’s size, reducing its capacity. He was relentless — and he didn’t stop there.
- He would also sell off TWA’s London routes to competitor American Airlines. Why? Well, why not? These transatlantic routes were a lucrative part of TWA’s international network. They attracted premium travellers who usually paid higher fares. These routes commanded a princely sum, which is why Icahn couldn’t wait to liquidate them.
- Such rapid asset sales led to generous cash distributions. Yes, this was very profitable for Icahn. And the situation only accelerated when he took the company private in 1988.
Throughout the 1990s, TWA continue to shrink. More and more assets were liquidated. By 2001, TWA was practically stripped clean:
- It had become a lame duck. It could no longer compete effectively in the industry. So, TWA was acquired by American Airlines. This ended its existence as an independent entity.
- As luck would have it, Carl Icahn exited TWA just before the notorious attacks of September 11th. Perhaps this was good fortune for him — but it was a sad end for TWA, a once-prestigious airline that had been driven into the ground.
Source: Image generated by OpenAI’s DALL-E
So, is Carl Icahn the villain in this story? Well, it’s a matter of interpretation:
- In all fairness, it’s worth noting that TWA was already underperforming by the time he arrived on the scene. It was stuck in a downward spiral.
- Therefore, Icahn simply went with the flow. Taking advantage of the company’s natural trajectory. His reasoning appeared to be this: ‘Why not make some money out of the doom loop?’
- It remains a matter of debate exactly how much Icahn contributed to TWA’s demise. Did the company die a natural death? Or was it an unnatural death? Well, therein lies the controversy.
- However, one thing is clear: Icahn profited to the tune of $469 million. This served to elevate his reputation as a corporate raider. And in the process, he became a Wall Street legend.
But watch out. Such a victory leads to hubris. And hubris seldom goes unpunished:
- Because Icahn had done very well by betting against individual companies like TWA, he decided to raise the stakes. Embark on a bigger gamble. Why not start betting against an entire nation?
- So, between 2017 and 2023, Icahn took up huge short positions against the American economy. Why? Because he believed that a recession and a crash was looming. Therefore, he shorted everything from market indices to commercial mortgages.
- Icahn intended to profit from an impending apocalypse — just like what he had done with TWA. This was a cynical move. But, hey, such a wager had served him well before. Besides, America was destined to fail. Right? Right?
Source: Apricitas Economics
Well, wrong. What Icahn didn’t count on was the courage and resilience of ordinary Americans:
- I’m talking about the honest, God-fearing folks who wake up each morning. Marching off to work. Putting their best foot forward. Fighting the good fight.
- Because of their heroic efforts, the mighty freight train of America didn’t decelerate. Instead, it accelerated. The United States economy experienced a productivity boom, smashing all expectations.
- In the process, Icahn found himself being crushed under that train. He was forced to unwind his short positions. This was a disaster for him. He lost over $9 billion.
Well, good grief. How could Carl Icahn have misjudged the situation so badly? Well, here are some excerpts from the Financial Times:
“I’ve always told people there is nobody who can really pick the market on a short-term or an intermediate-term basis,” Icahn told the FT in an interview to discuss the analysis. “Maybe I made the mistake of not adhering to my own advice in recent years.”
At times, Icahn’s notional exposure, the underlying value of the securities he was betting against, exceeded $15bn, regulatory filings show. “You never get the perfect hedge, but if I kept the parameters I always believed in . . . I would have been fine,” he said. “But I didn’t.”
The trades have left Icahn in a vulnerable position and threaten to undermine his status as one of the most feared activist investors on Wall Street.
Of course, Carl Icahn wasn’t the only one who made an embarrassing boo-boo here. There were many others like him:
- In 2023 alone, short sellers lost a record $195 billion by betting against America.
- Is this a one-off mistake? Well, not really. The long-term trend for short sellers has been absolutely terrible. They may have lost as much as 90% of their cash over the past two decades. Ouch.
An inverse ETF, designed to bet against the market. This bearish strategy has lost over 90% of its value since June 2006. Source: Google Finance
So, the next time you hear someone yell that the economy is going to collapse, perhaps you should smile politely. Then say this to them:
- ‘Why don’t act on your conviction? Why don’t you take up some short positions? You could earn megabucks if you’re right. But, of course, if you’re wrong, you could end up like Carl Icahn.’
Mm-hm. The basic lesson here is simple:
- In the short-term, the pessimists may score some media attention. But over the longer-term, it’s the optimists who will ultimately prevail. Because guess what? The weight of history is on their side.
- America has more entrepreneurs and immigrants than any other nation on Earth. Their courageous presence creates a dynamic energy that is not so easily defeated.
- My guess? The short sellers who continue to bet against America do so at their peril.
- In the words of Peter Lynch: ‘Far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves.’
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(This article is the author’s personal opinion and commentary only. It is general in nature and should not be construed as any financial or investment advice. Wealth Morning offers Managed Account Services for Wholesale or Eligible investors as defined in the Financial Markets Conduct Act 2013.)