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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

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.
  - btilly 6y ago
    Icahn has multiple investments. If he loses everything from Hertz, he is still remains one of the 25 richest people in the country. Secondly the VC issue isn't because VCs are not investors - they are. It is because VCs spread their money around and know very well that their investment returns depend on getting a home run or two. Gambling on high risk, high return strategies is therefore in the VCs interest, but not in the interest of people whose net worth is almost entirely in the company. This dynamic is widely understood and is a common source of conflict between VCs and founders. Thirdly related-party transactions are not necessarily a bad thing. I listed it as half in the company's interest. It is very good that when the company needs to do business they have someone to call who can make deals happen. But the activist investor isn't always acting in the company's best interests. That said, you are correct that Icahn was not the one who loaded Hertz with debt. (That restructuring happened in 2005 when Ford sold it to investment bankers.) But he has his own history of loading companies down with debt ever since he bought TWA back in the mid-80s. So the fact that he didn't do it to Hertz doesn't change the fact that he has proven willing to do so in the past.
- em500 6y ago
  A company does not have any interests since it's not sentient. A company serves different stakeholders, most importantly, customers, employees (which includes management) and owners, which for large companies is typically an enormous and diverse group, including VC, activists, passive absentee owners and usually also management. Your story that some activist or VCs don't act in the "companies" interest doesn't make much sense. At most you could say that some owners have different interests than others.
  - deleted 6y ago
    [deleted]
  - btilly 6y ago
    Short version, the interests of VCs are for higher risk than is in the interest of people whose lives are invested in the company. (Because the VC can spread risk across multiple investments, while the people in the company can't.)
    - em500 6y ago
      For modern large companies, employee tenures are typically only a few years and passive ownership (typically via investment funds) even shorter and more diversified, so I don't know which people you're talking about who have their whole life invested in a single company. VC aren't really interested in mom and pop restaurants and flower shops.
      - btilly 6y ago
        Clarification. VCs invest in startups, not "modern large companies". (Getting a modern large company would be the hoped for outcome, not starting place.) While it is true that the people working there generally move on after a few years, it is also true that founders and early employees dedicate their lives to the startup.
        em500 6y ago
        If your main claim is that VC interests are not fully aligned with founders or employees, sure, probably, but I don't seen any party having claim to some moral upper ground. If you're talking about SV style VC backed startups, It's not evident at all to me that VCs are seeking higher risk than founders seeking VC financing or early employees seeking significant equity stakes. Furthermore, they only dedicate a large part their lives to the if it looks like it's heading towards a big payoff, otherwise that dedication is limited to a few years at best.

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.
- btilly 6y ago
  Icahn has multiple investments. If he loses everything from Hertz, he is still remains one of the 25 richest people in the country. Secondly the VC issue isn't because VCs are not investors - they are. It is because VCs spread their money around and know very well that their investment returns depend on getting a home run or two. Gambling on high risk, high return strategies is therefore in the VCs interest, but not in the interest of people whose net worth is almost entirely in the company. This dynamic is widely understood and is a common source of conflict between VCs and founders. Thirdly related-party transactions are not necessarily a bad thing. I listed it as half in the company's interest. It is very good that when the company needs to do business they have someone to call who can make deals happen. But the activist investor isn't always acting in the company's best interests. That said, you are correct that Icahn was not the one who loaded Hertz with debt. (That restructuring happened in 2005 when Ford sold it to investment bankers.) But he has his own history of loading companies down with debt ever since he bought TWA back in the mid-80s. So the fact that he didn't do it to Hertz doesn't change the fact that he has proven willing to do so in the past.
em500 6y ago
A company does not have any interests since it's not sentient. A company serves different stakeholders, most importantly, customers, employees (which includes management) and owners, which for large companies is typically an enormous and diverse group, including VC, activists, passive absentee owners and usually also management. Your story that some activist or VCs don't act in the "companies" interest doesn't make much sense. At most you could say that some owners have different interests than others.
- deleted 6y ago
  [deleted]
- btilly 6y ago
  Short version, the interests of VCs are for higher risk than is in the interest of people whose lives are invested in the company. (Because the VC can spread risk across multiple investments, while the people in the company can't.)
  - em500 6y ago
    For modern large companies, employee tenures are typically only a few years and passive ownership (typically via investment funds) even shorter and more diversified, so I don't know which people you're talking about who have their whole life invested in a single company. VC aren't really interested in mom and pop restaurants and flower shops.
    - btilly 6y ago
      Clarification. VCs invest in startups, not "modern large companies". (Getting a modern large company would be the hoped for outcome, not starting place.) While it is true that the people working there generally move on after a few years, it is also true that founders and early employees dedicate their lives to the startup.
      - em500 6y ago
        If your main claim is that VC interests are not fully aligned with founders or employees, sure, probably, but I don't seen any party having claim to some moral upper ground. If you're talking about SV style VC backed startups, It's not evident at all to me that VCs are seeking higher risk than founders seeking VC financing or early employees seeking significant equity stakes. Furthermore, they only dedicate a large part their lives to the if it looks like it's heading towards a big payoff, otherwise that dedication is limited to a few years at best.