Carl Icahn

Predator

Carl Icahn grew up in Queens, New York City and went to Princeton to study philosophy. At his mother's urging he attended medical school but hated it and dropped out after two years and joined the Army. In 1961, after his stint in the Army, his uncle got him a job as a trainee stockbroker with Dreyfus and Company. After he acquired some experience in stock trading he decided he should have a specialty and he became an options broker with Tessel Patrick and Company. In 1964 Icahn and his fellow options brokers moved to another broker, Gruntal, and created its options department. He started a successful newsletter called The Mid-Week Options Report.

In 1967 Icahn decided to start his own discount brokerage and borrowed $400,000 from his uncle to buy a seat on the New York Stock Exchange. Since his army days Icahn had been a committed gambler. For recreation he gambled, and at work he gambled in terms of options. He became an arbitrageur mixing options with classical arbritrage operations, something that was then unusual. About this time Icahn became notorious for being tight-fisted. He was also 'notorious for his sudden rages, and for the abuse of employees, minority partners, outside lawyers.' Icahn invested in REIT's (Real Estate Investment Trusts) at a time their prices were severely depressed. He gained control of one, Baird and Warner, with assets of $30 million. In 1979 Icahn won a proxy fight for Tappan, the manufacturer of stoves. He used his position on the board directors to force the sale of Tappan to a Swedish firm. Icahn made about $3 million on that venture. Icahn decided to attempt more proxy fights to sell off undervalued companies. These started as attempts to gain control of companies, but he soon learned that unsuccessful proxy fights could also be profitable. Worried management groups were often willing to pay a premium for stock held by Icahn. This 'buyback at a premium' came to be known as 'greenmail.' Hammermill Paper Company became Icahn's next target. The Hammermill management instituted antitakeover measures and fought back by conducting their own proxy campaign and suing Icahn for security law violations and fraud. Icahn lost the proxy contest and the company was not going to pay him greenmail. He negotiated a settlement that protected the management against future raids. After a year Hammermill stock rose enough that Icahn could sell his ten percent ownership a profit of $9 million. But Icahn was constrained by his limited amount of capital. He could not buy out the companies he was investing in and their management knew it. They could call his bluff. He needed additional sources of financing. In 1982 Icahn, with the backing of several financiers, attempted a raid on the retailer Marshall Fields. Icahn had developed a reputation for unscrupulousness and Marshall Fields fought back not only with the usual allegations of securities rules violation but also it claimed violation of the RICO statute (Racketeering Influenced and Corrupt Organizations Act), a law created to deal with organized crime. Marshall Fields charged that Icahn was using funds derived from a 'pattern of racketeering.' This legal ploy did not stop Icahn and Marshall Fields merged with a British retailer.

After the Marshall Fields venture Icahn had about $100 million to use for raiding. He bought into Anchor Hocking, American Can, and Owens-Illinois and was bought out at a premium by management about a week after he made his purchases. His attempted raid on Dan River resulted in his gaining more of an image of an ogre when the people of Danville, Virginia came to the aid of Dan River with their retirement money. Icahn did gain control of a railcar leasing company, ACF using $410 million which he raised through bank loans and the sale of a division of ACF. Icahn had shifted his strategy from greenmail to acquisition and dismemberment of corporations. About this time Drexel Burnham contact Icahn and offered to raise funds for him. With this backing Icahn made an $8.1 billion tender offer for Phillips Petroleum. Half of this was to be paid in cash and half in securities. Icahn limited Drexel Burnham's share of the cash financing to $1.5 billion and Michael Milken raised this in 48 hours. Icahn did not succeed in acquiring Phillips and ended taking around $25 million from Phillips as compensation of 'expenses.' He also made a profit on his Phillips stock acquisitions. Icahn noticed that the airline TWA, although just breaking even in terms of profit, had $200 million in depreciation so its cash flow was hefty. In 1985 Icahn started acquiring stock in TWA. Drexel Burnham discouraged him from this takeover attempt because it had done financing for TWA the previous year and had a policy of not helping takeover attempt against its own customers. Icahn was not dissuaded, and he increased his share of TWA stock ownership to 20 percent.

TWA mobilized against Icahn. The company filed numerous suits seeking injunctions. The labor unions conducted an anti-Icahn campaign. Both the union and management lobbied Congress against him.

The legal moves were blocked and TWA looked for a white knight. They thought they had found one in Frank Lorenzo of Texas Air. Lorenzo had started his career as a financial analyst for TWA and then took control of Texas International Airlines in 1972. Lorenzo had used Drexel Burnham to finance a leveraged buyout of Texas Air and Leon Black of Drexel Burnham represented him in the negotiations with Icahn. Black worked out a deal with Icahn that would have paid Icahn $95 million and given control of TWA to Lorenzo. Lorenzo tried to shave the profit Icahn was going to get by about $7 million and the deal fell through. Icahn ended up getting control. The unions at TWA were not in favor of Lorenzo getting control anyway because when Lorenzo got control of Continental he abrogated union contracts and cut wages by 50 percent. To the unions, Carl Icahn was more of a white knight than Frank Lorenzo. Icahn negotiated a deal with the unions which involved concessions on the unions' part along with profit-sharing and stock ownership. This enabled Icahn to effectively match Lorenzo's offer for TWA. Actually the sequence of bidding went like this. Icahn offered $18 per share. Lorenzo offered $23 and Icahn preferred to sell at that level. But after the breakdown of the negotiation with Lorenzo and Icahn emergence at a white knight for the unions, Icahn bid $24. Lorenzo then offered $26. Because of the bitterness toward Lorenzo felt by the employees, the Board of Directors of TWA would choose any offer that was reasonably close. The unions wanted Icahn to raise his offer to $25 but he held fixed at $24. Nevertheless the Board did accept Icahn's offer over that of Lorenzo. Icahn found himself in charge of a major airline.