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Classic story of how “activists investor” like Carl Icahn are sucking out blood out of perfectly functional companies. You find vulnerable companies, load them

Classic story of how “activists investor” like Carl Icahn are sucking out blood out of perfectly functional companies. You find vulnerable companies, load them up with debt, transfer their assets out and then have them declare bankruptcy. These “activist investors” have singular goal of short term profits while killing perfectly good companies. There needs to be laws to put these people in jail.

icelancer 6y ago
Yeah Carl Icahn really got Hertz's ass by losing over a billion dollars of his own money.
- iscrewyou 6y ago
  His formula didn’t account for the pandemic variable. Otherwise, everything was going to plan like it has before with his investments. Yeah, he lost money. But that doesn’t mean he was not doing his usual schtick when it comes to loading up the companies with debt.
hogFeast 6y ago
There is a law against this (it is called fraudulent conveyance). And most activist investors don't plan to lose all their money. I don't know where this meme comes from but investor's interests are totally aligned with the company (Ichan lost nearly $2bn here...how much did the CEO lose? The article says they bought a few shares that didn't go up...oh, won't someone think of the poor CEO). You can't "transfer their assets out" if you are an investor or "load them up with debt"...that just isn't how corporations work (most activists have non-controlling stakes). The issue, and the reason activist investors exist, is because the interests of management are usually not aligned with the company. Most of these companies are vulnerable because they are poorly run. If you want to criticise them, you have to start by saying that you think managers are never wrong and shouldn't be accountable to do the people that pay their wages...go ahead (bear in mind, former managers at Hertz committed accounting fraud and the reason Icahn came on board was massive market share loss).
- btilly 6y ago
  The interests of investors are actually not aligned with the company. They are just misaligned in a different way from management. To give a classic and well-known example, consider the type of investor known as "venture capital". Their interests are to make sure that the founders don't run off with their money, and to have the company "swing for the fences" to have a shot at outsized returns. If all of their companies do this, the ones that succeed pay for the majority that failed. But it is typically in the company's interests to be more conservative. To take guaranteed growth over a lottery ticket for stellar growth. Now consider this case. Ichan has an incentive to fix management fraud (this aligns with the company), to increase volatility to increase the odds of a good payout (loading the company with debt does this), and to have the company do business with his other businesses. About 1.5 of these incentives align with the company's interests. (The first and half of the third.) The others do not. And the second in particular is close to the misalignment that venture capital has with startups.
  - hogFeast 6y ago
    Wow. That is a really complicated way of thinking about it. Icahn had nothing to do with "loading the company with debt"...again, he didn't have a controlling stake, he didn't have a majority on the Board (iirc)...the reason they used a lot of debt is because they own a lot of vehicles (the majority of their debt is secured). The reason he came to the company wasn't financial structure (that does occur but very rarely...again, most investors don't want to lose all their money...this isn't a hard point requiring maths) but chronic mismanagement and huge market share loss. He didn't increase volatility (every other company in the sector uses the same kind of debt). No activist investor acquires a company so that they can do related-party transactions. Again, they often don't have a controlling stake. Icahn owns about $50bn worth of businesses, it would not surprise me if one of his companies does business with Hertz...but there is no way that he can control this. Btw, if you are an activist and you acquire a reputation for doing things that hurt other shareholders (related-party transactions would be an example) then you will lose your ability to run these campaigns overnight. Activist investing is based on appealing to other shareholders and being able to make changes that produce results. Again, all of these errors seem to arise out of not really understanding how companies work (unsurprising given your confused take). I don't understand your point about: it is in the company's interest to go for "guaranteed growth"...no growth is guaranteed, you aren't buying a washing machine...and if a VC goes for growth that isn't profitable, they lose everything. Again, this isn't confusing. The point that you appear to be referring to, but didn't quite get, is that VCs often aren't aligned with companies because they often don't care whether they succeed or fail. Investors have everything at stake. VCs just have an option on that stake. That doesn't really apply here. Icahn has all of his own money invested.
bobcostas55 6y ago
If this were true you could make a killing betting against activist investors. I doubt you would succeed.
- 082349872349872 6y ago
  Only if you have the same pocketbook. See the Herbalife short squeeze for how many zeros it takes and how many years it can last. There's a reason they call market manipulation "billionaire's poker".
- notJim 6y ago
  Not everything that's good for society is profitable, especially in the short term.
  - anm89 6y ago
    I don't think you are understanding that comment correctly. Its not making a moral argument at all. It's making an argument regarding the business outcomes of PE. He's not saying it's good or bad either way. He's saying a simple piece of deductive logic proves it isn't fully correct.
at-fates-hands 6y ago
The modern day "corporate raider".
- lordnacho 6y ago
  He's actually the original corporate raider. He got lots of press in the 1980s.
cortesoft 6y ago
What I don't understand is why lenders keep funding debt for the companies when they are just going to declare bankruptcy. You would think creditors would get wise to the scam.
- adventured 6y ago
  The loss Hertz was producing wasn't outrageous compared to their sales and operating income (2019: $9.8b sales, $759m operating income, $805m in debt interest expenses). If you're Hertz you can make a very good case that that is a situation that can be managed, as they had been producing some growth over the prior years as well. Operating income had gone from $167m to $442m to $759m. It looked like they had a solid shot at climbing above the killer debt interest costs in 2020. They were clearly in trouble, however the pandemic is what buried them. Lenders didn't see that coming.
- lordnacho 6y ago
  It's not inevitable at the time when the debt is raised that it will be unserviceable. The creditors will have a view on whether the firm can service the debt, but typically that doesn't incorporate a complete cessation of business due to a global pandemic. Whether in the larger picture the creditors are getting paid enough to take on the risk is an interesting question. My guess is that they don't take enough account of a scenario where many bankruptcies happen at once.
- empath75 6y ago
  in a lot of cases, the people in charge of those loans are self-dealing and don't give a shit if the company they work for loses money on it. That's what the savings and loan crises was about.
- ww520 6y ago
  The debt probably has seniority over other obligation and can be recovered from the remaining assets.
itsoktocry 6y ago
>These “activist investors” have singular goal of short term profits while killing perfectly good companies. Despite the 3rd party transactions being ethically dubious, Icahn lost a bundle on his equity, so I'm not sure there was much "short term profit" earned here.
beervirus 6y ago
How much did Icahn lose on his equity position in Hertz? If he owned 39%, that loss would have been on the order of a billion dollars. So there's probably more to the story than your comment suggests.
- danesparza 6y ago
  Oh, there's a hell of a lot more to the Icahn story than just this one idiot move. https://en.wikipedia.org/wiki/Carl_Icahn https://en.wikipedia.org/wiki/Carl_Icahn Yes - he did lose a lot of money, but please understand he was in the process of sucking the company dry when the pandemic hit: https://www.cnbc.com/2020/05/26/carl-icahns-bet-on-hertz-goes-bust-as-rental-car-company-files-for-bankruptcy.html https://www.cnbc.com/2020/05/26/carl-icahns-bet-on-hertz-goe...
- toomuchtodo 6y ago
  Icahn lost roughly $1.6 billion on his equity stake.

icelancer 6y ago

Yeah Carl Icahn really got Hertz's ass by losing over a billion dollars of his own money.

iscrewyou 6y ago
His formula didn’t account for the pandemic variable. Otherwise, everything was going to plan like it has before with his investments. Yeah, he lost money. But that doesn’t mean he was not doing his usual schtick when it comes to loading up the companies with debt.

hogFeast 6y ago

There is a law against this (it is called fraudulent conveyance). And most activist investors don't plan to lose all their money. I don't know where this meme comes from but investor's interests are totally aligned with the company (Ichan lost nearly $2bn here...how much did the CEO lose? The article says they bought a few shares that didn't go up...oh, won't someone think of the poor CEO). You can't "transfer their assets out" if you are an investor or "load them up with debt"...that just isn't how corporations work (most activists have non-controlling stakes). The issue, and the reason activist investors exist, is because the interests of management are usually not aligned with the company. Most of these companies are vulnerable because they are poorly run. If you want to criticise them, you have to start by saying that you think managers are never wrong and shouldn't be accountable to do the people that pay their wages...go ahead (bear in mind, former managers at Hertz committed accounting fraud and the reason Icahn came on board was massive market share loss).

btilly 6y ago
The interests of investors are actually not aligned with the company. They are just misaligned in a different way from management. To give a classic and well-known example, consider the type of investor known as "venture capital". Their interests are to make sure that the founders don't run off with their money, and to have the company "swing for the fences" to have a shot at outsized returns. If all of their companies do this, the ones that succeed pay for the majority that failed. But it is typically in the company's interests to be more conservative. To take guaranteed growth over a lottery ticket for stellar growth. Now consider this case. Ichan has an incentive to fix management fraud (this aligns with the company), to increase volatility to increase the odds of a good payout (loading the company with debt does this), and to have the company do business with his other businesses. About 1.5 of these incentives align with the company's interests. (The first and half of the third.) The others do not. And the second in particular is close to the misalignment that venture capital has with startups.
- hogFeast 6y ago
  Wow. That is a really complicated way of thinking about it. Icahn had nothing to do with "loading the company with debt"...again, he didn't have a controlling stake, he didn't have a majority on the Board (iirc)...the reason they used a lot of debt is because they own a lot of vehicles (the majority of their debt is secured). The reason he came to the company wasn't financial structure (that does occur but very rarely...again, most investors don't want to lose all their money...this isn't a hard point requiring maths) but chronic mismanagement and huge market share loss. He didn't increase volatility (every other company in the sector uses the same kind of debt). No activist investor acquires a company so that they can do related-party transactions. Again, they often don't have a controlling stake. Icahn owns about $50bn worth of businesses, it would not surprise me if one of his companies does business with Hertz...but there is no way that he can control this. Btw, if you are an activist and you acquire a reputation for doing things that hurt other shareholders (related-party transactions would be an example) then you will lose your ability to run these campaigns overnight. Activist investing is based on appealing to other shareholders and being able to make changes that produce results. Again, all of these errors seem to arise out of not really understanding how companies work (unsurprising given your confused take). I don't understand your point about: it is in the company's interest to go for "guaranteed growth"...no growth is guaranteed, you aren't buying a washing machine...and if a VC goes for growth that isn't profitable, they lose everything. Again, this isn't confusing. The point that you appear to be referring to, but didn't quite get, is that VCs often aren't aligned with companies because they often don't care whether they succeed or fail. Investors have everything at stake. VCs just have an option on that stake. That doesn't really apply here. Icahn has all of his own money invested.

bobcostas55 6y ago

If this were true you could make a killing betting against activist investors. I doubt you would succeed.

082349872349872 6y ago
Only if you have the same pocketbook. See the Herbalife short squeeze for how many zeros it takes and how many years it can last. There's a reason they call market manipulation "billionaire's poker".
notJim 6y ago
Not everything that's good for society is profitable, especially in the short term.
- anm89 6y ago
  I don't think you are understanding that comment correctly. Its not making a moral argument at all. It's making an argument regarding the business outcomes of PE. He's not saying it's good or bad either way. He's saying a simple piece of deductive logic proves it isn't fully correct.

at-fates-hands 6y ago

The modern day "corporate raider".

lordnacho 6y ago
He's actually the original corporate raider. He got lots of press in the 1980s.

cortesoft 6y ago

What I don't understand is why lenders keep funding debt for the companies when they are just going to declare bankruptcy. You would think creditors would get wise to the scam.

adventured 6y ago
The loss Hertz was producing wasn't outrageous compared to their sales and operating income (2019: $9.8b sales, $759m operating income, $805m in debt interest expenses). If you're Hertz you can make a very good case that that is a situation that can be managed, as they had been producing some growth over the prior years as well. Operating income had gone from $167m to $442m to $759m. It looked like they had a solid shot at climbing above the killer debt interest costs in 2020. They were clearly in trouble, however the pandemic is what buried them. Lenders didn't see that coming.
lordnacho 6y ago
It's not inevitable at the time when the debt is raised that it will be unserviceable. The creditors will have a view on whether the firm can service the debt, but typically that doesn't incorporate a complete cessation of business due to a global pandemic. Whether in the larger picture the creditors are getting paid enough to take on the risk is an interesting question. My guess is that they don't take enough account of a scenario where many bankruptcies happen at once.
empath75 6y ago
in a lot of cases, the people in charge of those loans are self-dealing and don't give a shit if the company they work for loses money on it. That's what the savings and loan crises was about.
ww520 6y ago
The debt probably has seniority over other obligation and can be recovered from the remaining assets.

itsoktocry 6y ago

>These “activist investors” have singular goal of short term profits while killing perfectly good companies. Despite the 3rd party transactions being ethically dubious, Icahn lost a bundle on his equity, so I'm not sure there was much "short term profit" earned here.

beervirus 6y ago

How much did Icahn lose on his equity position in Hertz? If he owned 39%, that loss would have been on the order of a billion dollars. So there's probably more to the story than your comment suggests.

danesparza 6y ago
Oh, there's a hell of a lot more to the Icahn story than just this one idiot move. https://en.wikipedia.org/wiki/Carl_Icahn https://en.wikipedia.org/wiki/Carl_Icahn Yes - he did lose a lot of money, but please understand he was in the process of sucking the company dry when the pandemic hit: https://www.cnbc.com/2020/05/26/carl-icahns-bet-on-hertz-goes-bust-as-rental-car-company-files-for-bankruptcy.html https://www.cnbc.com/2020/05/26/carl-icahns-bet-on-hertz-goe...
toomuchtodo 6y ago
Icahn lost roughly $1.6 billion on his equity stake.