As for the future, Icahn seems to be very reserved. He is definitely not forecasting a “V”-shaped economic recovery, rather, he sees possibility of a double-dip recession, and the equity and credit market simply went ahead of the fundamental in 2009. As he stated in the letter (Page 6):The contrast between the investment environments of 2008 and 2009 could hardly be more stark. 2008 was defined by an utter lack of liquidity, while 2009 came to be a year of excess liquidity. With cash yielding close to nothing last year, yield-hungry investors felt that they could no longer sit on the sidelines. They plunged head first into both equity and credit, aggressively driving up the markets. Yet where and what were the signs suggesting that the fundamentals had changed and that the economy was on the mend? While some economic indicators showed signs of improvement towards year end, a key indicator, unemployment, still remains high. Icahn will not declare no victory unless employment picks up and corporate balance sheets cleaned up:We belive that until employment picks up, both the housing market and the overall economy will remain weak as debt-laden consumers will be unwilling (and unable) to open their wallets. Many consumers seem down-right scared to spend money. In short, we believe that a true economic recovery will require a healthier and more confident consumer. In addition, many corporate balance sheets are still impaired with too much leverage. I believe that this combination of obstacles will not be bypassed as quickly and easily as many seem to think.One has to question whether Icahn is talking down the economy as a gloom and doom economy is actually good for a distressed investor like himself – a point he is very frank about in the letter:an environment in which good companies with bad balance sheets are forced to file and reorganize is an environment in which we have the ability to earn outsized returns. Our team of investment and legal professionals is certainly one of the best in terms of its understanding of distressed debt, distressed of control situation, as well as the bankruptcy process. The current environment is ripe for some M&A activities, another area activist Icahn knows how to create value for his investors. Particularly, he sees marriages between cash-rich big pharma and tech-savvy biotech companies:One benefit of the increase in liquidity is a potential uptick in M&A activity due to the fact that some companies may begin to feel cash-rich while others may find themselves on the auction block. This paradigm is tailor made for the activist investor. While we don’t believe that the stars have aligned quit yet in many sectors, a notable exception is biotech. Big pharma is notoriously cash-rich, which means they are not dependent on financing, and we believe their appetite for biotech is as big as ever.Icahn also commented on the individual investments in his portfolio:
CIT Group Inc. (CIT)
CIT Group Inc. is a bank holding company that provides financing and leasing capital for commercial companies throughout the world.
Carl Icahn acquired 9,705,373 shares in the quarter that ended on 12/31/2009, which is 9.33% of the $2.87 billion portfolio of Icahn Capital Management LP. The shares resulted from CIT’s pre-packaged bankruptcy reorganization.
Icahn provided the following on the re-organized CIT:We played a very active role in helping to drive and enhance the value of CIT’s prepackaged plan of reorganization. We believe we were the Company’s largest individual creditor and we exerted our rights to ensure that the reorganized Company was best positioned to succeed financially and structured from corporate governance perspective to drive accountability. Specifically, we were influential in demanding that the new CIT board world be comprised of a majority of new directors nominated by existing bondholders, that the old management team be replaced and that significant cash flow weeps be put in place to help ensure that CIT prudently would down activities at the holding company and returned money to bondholders while allowing an appropriate runway to attempt to fund its most valuable business platforms from its bank through a diversified, low cost, stable deposit funding model. We believe that our involvement in CIT helped to consummate a quick restructuring and did so in a manner that substantially increased the recoveries to bondholders.
Motorola Inc. (MOT)
Motorola, Inc. is a provider of integrated communications solutions and embedded electronic solutions. Motorola Inc. has a market cap of $17.07 billion; its shares were traded at around $7.38 with a P/E ratio of 369 and P/S ratio of 0.7.
Carl Icahn owns 119,790,447 shares as of 12/31/2009, which accounts for 32.35% of the $2.87 billion portfolio of Icahn Capital Management LP.
With Motorola, Icahn’s ideal of creating value is to split the company into two company and he seems to be getting his way:Motorola’s most recent 10-Q states “The Company has previously announced that it is pursuing the creation of two independent, public traded companies. The Company continues to progress on various elements of its separation plan. Management and the Board of Directors remain committed to separation in as expeditious a manner as possible and continue to believe this is the best path for the Company to maximize value for all its shareholders.”Icahn believes that Motorola’s stock has the potential for significant upside in 2010.
Biogen Idec Inc (BIIB)
Biogen IDEC Pharmaceuticals Corporation is a biopharmaceutical company engaged primarily in the research, development and commercialization of targeted therapies for the treatment of cancer and autoimmune and inflammatory diseases. Biogen Idec Inc has a market cap of $16.1 billion; its shares were traded at around $59.73 with a P/E ratio of 14.8 and P/S ratio of 3.7.
Carl Icahn owns 12,860,205 shares as of 12/31/2009, which accounts for 23.94% of the $2.87 billion portfolio of Icahn Capital Management LP.
With Biogen, Icahn has much success in shaking up the management and change the strategic course of the company. In his own words: During the quarter, Chairman Bruce Ross announced that he would step down. Then on January 4, 2010, Biogen’s CEO, Jim Mullen, announced that he would also step down. We believe these changes provide Biogen with the opportunity to seek fresh management and also to improve its business. During the quarter, the Company also announced that it had dropped its $420 million bid for Facet Biotech Corp., believing the price was too high. We were happy to see the Company exercise fiscal discipline.
Trump Entertainment Resorts Inc. (TRMPQ)
Trump Entertainment Resorts Inc. is a gaming company that owns and operates four properties. The company has filed for Chapter 11 bankruptcy in February 2009. The company’s stock is traded over-the-counter under the symbol “TRMPQ”. Trump Entertainment Resorts Inc. has a market cap of $3.25 million.
Recently, Icahn disclosed that he purchased 50% of the outstanding senior bank debt from Beal Bank and committed to buy the remaining 50%. The gaming industry attracts Icahn because he thinks his firm has substantial experience in gaming industry. He thinks there are opportunities here to make a lot of money for his shareholders.
The financial and credit crisis created many opportunities for activist Carl Icahn, who sees opportunities and creates values for his investors with equity and credit positions, in merger and spin-off situations.
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About the author:
My name is Ben C. and I am 2nd year MBA candidate at the Anderson School of Business at the University of California- Los Angeles. I have a BS in Economics from the Wharton School of Business at the University of Pennsylvania. Before coming to Anderson I worked as a generalist equity research analyst for Right Wall Capital, a long-short equity hedge fund located in New York City. Prior to working at Right Wall I worked as an analyst at Blue Ram Capital, another long-short equity hedge fund located in Rye Brook, NY. This past summer, I worked for West Coast Asset Management as a research analyst. West Coast, which was co-founded by Kinko’s founder Paul Orfalea, is run by well-known value investors Lance Helfert and Atticus Lowe.