Time Warner and Icahn Settlement
Submitted by: Chris Young, M&A Research Director
On Friday, February 17th, Time Warner and Carl Icahn settled their putative proxy fight a little over a week after Lazard issued a report commissioned by Icahn in support of his agenda. Speaking as a former investment banker, I can attest to the blood, sweat and tears that went into the report, perhaps the most in-depth analytical presentation I've ever seen an investment bank put together for public consumption. This clearly was not a frivolous exercise or some kind of trial balloon, so it's a little surprising that the fight was dropped a week and a half after the report's highly public unveiling. Icahn faced a February 19th deadline to submit nominees to the board, and it's clear that after sifting through the tea leaves he decided that a settlement would be more productive than a proxy contest. Alan Murray in today's Wall Street Journal talks about some of the lessons that shareholders should draw from the "Icahn affair."
The Economy
BUSINESS: Hedge-Fund Lessons From the Icahn Affair
By Alan Murray
The Wall Street Journal
22 February 2006
(Copyright (c) 2006, Dow Jones & Company, Inc.)
THIS IS SUPPOSED to be the Year of Hedge Fund Activism. Hedge funds, we've been told, are the new barbarians, rattling the gates of entrenched corporate management. Lawyer Marty Lipton, centurion of the palace guard, sent his warning out last December, urging big-company clients to steel themselves against hedge-fund attacks. Merrill Lynch began marketing its skill at building ramparts.
And then Carl Icahn -- who declared in the pages of this newspaper just three weeks ago that he had no intention of giving up his campaign against Time Warner -- gave up. Chief executives everywhere breathed a sigh of relief. Maybe the hedge-fund threat was just a passing fad after all.
Don't count on it.
Here are some of the wrong lessons being drawn from the Icahn affair, and the right ones:
Time Warner Chief Executive Richard Parsons won this battle because he had loyal shareholders. In a meeting with the The Wall Street Journal last week, Mr. Parsons boasted that his company had "a pretty sophisticated shareholder base." True enough. But Mr. Icahn's goal at the outset wasn't to win over the old shareholders; it was to persuade a raft of hedge funds to become new shareholders. He wanted to be the Pied Piper of hedge-fund investors. And that didn't happen. When he played his music -- with accompaniment from Bruce Wasserstein of Lazard -- the hedge funds didn't follow.
Big companies are immune to hedge-fund attacks. The jury is out on this one. Mr. Icahn told me yesterday that "when you have an $80 billion company, hedge funds alone can't do it." But hedge funds control more than a trillion dollars, and they are desperately searching for good ideas to make big returns. Hedge-fund managers tell me that if the idea is right, the money will be there. Even if hedge funds can't win control of an $80 billion company, they can certainly create the momentum for change.
Mr. Parsons is doing a fine job running Time Warner. Don't get carried away. Many of the criticisms that Mr. Icahn and Mr. Wasserstein leveled at Time Warner had the sting of truth. The company has done a lousy job managing AOL, which missed out on the big surge in the search business and stuck with its "walled garden" approach to the Internet for far too long -- though much of that precedes Mr. Parsons.
Moreover, there is something unnerving about Mr. Parsons's talk of his company as a giant hedge. The essence of leadership is vision, and the essence of strategy is choice. Mr. Parsons seems a little too willing to acknowledge his lack of a clear vision of the future, which makes it more difficult for him to make choices about where to devote his resources.
The problem is, no one else seems to have a very clear vision of the future of media, either. Mr. Icahn's idea of spinning off Time Warner's cable-distribution assets lost its luster last fall, as the stock price of cable rival Comcast took a tumble. Enlisting former Viacom chief Frank Biondi as his choice to replace Mr. Parsons didn't help much. Mr. Biondi was seen more as a retread of the past than a leader for the future.
So what are the real lessons in all of this? Here are some:
Companies can't sit on cash without risking a hedge-fund attack. Private-equity firms make much of their money these days by adding debt to the company balance sheet, enabling investors to get "leveraged" returns. Why shouldn't public-company investors be entitled to the same? Mr. Icahn didn't succeed in breaking up Time Warner, but he did succeed in forcing the company to buy back more stock, paying out cash and increasing its debt.
Mr. Icahn isn't going away. The investor turned 70 on the day he cut the Time Warner deal, but shows no sign of retiring. Next stop: South Korea, where he has targeted the country's largest tobacco manufacturer, KT&G, and is demanding three board seats. "I intend to keep doing this," he says.
The managers of the largest activist hedge funds are, by and large, pretty smart people. And they are doing a service for public-company investors. The backlash against these hot money movers -- fueled by nationalism in parts of Europe and Asia -- is overwrought. The Time Warner episode shows that the funds won't attack en masse unless they have very good reason. And if they have good reason, we should all cheer them on.
"Shareholder democracy" has never proven itself to be very potent at holding corporate leaders accountable. Maybe hedge-fund democracy has more promise.
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Email me at business@wsj.com and read reader comments Saturday at WSJ.com/TalkingBusiness.
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Comments
Now it looks like Icahn can focus more of his attention on the upcoming March 17 meeting at Korea's KT&G where he is seeking three board seats and attempting to convince management to spin-off its ginseng business and improve dividends.
Posted by: Michael Gray | February 22, 2006 4:41 PM
Alan Murray writes in the WSJ that hedge funds control more than a trillion dollars, and they are desperately searching for good ideas to make big returns. If the idea is right, the money will be there. Companies can't sit on cash without risking a hedge-fund attack.
"The Time Warner episode shows that the funds won't attack en masse unless they have very good reason. And if they have good reason, we should all cheer them on. "Shareholder democracy" has never proven itself to be very potent at holding corporate leaders accountable. Maybe hedge-fund democracy has more promise," says Murray. (Hedge-Fund Lessons From the Icahn Affair, 2/22/2006)
Murray's gratuitous comment, "'Shareholder democracy' has never proven itself to be very potent at holding corporate leaders accountable. Maybe hedge-fund democracy has more promise" is disconcerting. It belittles the efforts of everyone from individual investors to the Council of Institutional Investors, whose members have fiduciary responsibility for more than $3 trillion.
Shareholder democracy hasn't proven effective because it hasn't been tried in anything other than a vocabulary which promises "elections" and "independent" directors. Unlike hedge-funds, many of us fighting for shareholder democracy are owners for the long-term who want to improve our companies as problems arise, not by creating a bump and cashing out.
In August 2002, Les Greenberg, of the Committee of Concerned Shareholders, and I filed a formal Petition for Rulemaking with the SEC, which sought to require corporations to place the names of Shareholder nominated Director-candidates on corporate ballots. The result would have been meaningful elections and directors dependent on shareholders. Opposition lobbying by the Business Roundtable and Chamber of Commerce and a gutless SEC, which introduced an overly complex rulemaking on the subject, placed rapid growth of corporate democracy on hold.
Under the current administration, it appears winning the right to require a majority vote for elections of corporate Directors is the most we can hope for, but we are doing it one company, and perhaps one state, at a time.
Posted by: James McRitchie | February 23, 2006 8:53 PM