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The Carl Icahn Effect: A Primer on Activist Investors

Carl Icahn is arguably the most famous activist investor of his time, if not all time. The billionaire investor has had his hands in a number of corporate moves and shifts over the years, with a number of notable successes. But how can one man have so much influence over some of the largest companies in the world? Below, we’ll explain how activist investors work using the many examples given by Icahn over the years.

What Are Activist Investors?

Activist investors are individuals or groups that purchase large amounts of shares in a public company in order to make a major impacts on and changes to the company. Some activist investors will also try to get a seat on the company’s board in order to achieve that goal. Typically, these investors target companies they believe to be mismanaged or ones that could be run more profitably. The goal is to fix the underlying issue to increase the company’s value and profit from the rise in its share price [see also The Unofficial Guide To Being An Investor].

The problem with activist investors is that they can be a burden to companies and force companies into making moves and changes. Sometimes this works out well for underlying company, and sometimes it does not. Carl Icahn has fallen more on the former side throughout his career, and has made similar moves at dozens of companies around the world.

Who Is Carl Icahn?

For a brief background, Carl Icahn began his career as a stockbroker in 1961 and quickly moved into taking controlling interests in certain companies. He earned a ruthless reputation after completing a hostile takeover of TWA in the mid 1980s. Since then, he has made moves in all kinds of publicly traded companies, taking some private, and attempting to turn others around. Today, he has a net worth in excess of $24 billion, and at age 78 he is still a major force to be reckoned with on Wall Street.

Carl Icahn's Notable Moves

From the looks of it, Icahn has no plans of retiring anytime soon, as he has remained vehemently active in 2014 with a number of companies, most notably Apple. Below, we outline just a few of the most recent moves and investments that Icahn has made on the street:

Apple (AAPL ): Icahn’s AAPL position started with a bang on 8/13/2013 when the billionaire Tweeted the following: “We currently have a large position in Apple. We believe the company to be extremely undervalued.” That tweet alone prompted AAPL to jump nearly 5% for the trading session. Since then, Icahn has been actively (and publicly) lobbying for an increased buyback program, demanding the company return some of its large cash pile to shareholders. The company eventually raised its buyback program, but not quite as much as Icahn was hoping for.

Herbalife (HLF): This position created a public feud between Icahn and fellow billionaire Bill Ackman. Icahn took a major stake in the company and also got two of his representatives on the board (and eventually three more in early 2014). Ackman, on the other hand, has been publicly denouncing the company and has a short position in the stock worth approximately $1 billion. The two have had choice words for each other over the years, but it seems like Icahn has won the battle thus far, as Ackman has failed to convince Wall Street that Herbalife is a fraud.

eBay Inc. (EBAY): Icahn began publicly shaming eBay in early 2014, calling it one of the worst-run companies he had ever seen. Holding a large position, Icahn urged the company to spin-off PayPal and also demanded two seats on the company’s board back in April of 2014. The two sides agreed to have Icahn withdraw his demands by both agreeing on adding David W. Dorman as a director. eBay ended up spinning off PayPal in August of 2014, causing its stock to pop 5%.

Hertz Global Holdings (HTZ): In late August 2014, Icahn revealed an 8.5% stake (38.8 million shares) in Hertz, believing the shares to be undervalued and noting that he may seek board representation.

Be sure to also read How to Find Undervalued Dividend Stocks.

Stopping Activist Investors: Google (GOOG) in Focus

As you can imagine, dealing with an activist investor making public and private demands can be quite a burden to management. If Icahn can make an impact on Apple, the largest company in the world, he can do it just about anywhere. Seeing that, some companies have taken it upon themselves to make it more difficult for large investors to take control of their company. One notable example came from Google when it “split” its stock early in 2014 [see also Why Google Doesn’t Pay a Dividend].

Google split its stock 2-for-1 by creating a new C-class of its shares. Prior to the split, there were A- and B-shares; management and higher-ups owned B-class (which are private) shares, which come with 10 votes each, while A-shares have just one. In creating the C-class, Google dictated that these new shares would have no voting power. That means that someone like Carl Icahn could buy up all of C shares he wants, but he would not be able to take control of the company.

The Bottom Line: How Activist Investors Impact You

For the most part, an activist investor takes a position in a stock with the hopes of increasing its share price, which is certainly a positive sign for any shareholders; however, this does not necessarily guarantee success. In the grand scheme of things, if an activist investor takes a position in a stock you own, it is done with the intention of increasing shareholder value, so you do not have much to worry about.

If you are uncomfortable with the investor who has taken a new position or believe that they do not have your best interests at heart ,you may want to think about exiting your position until the dust settles and said investor has moved on.

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