My writing is mostly on business models and digital strategy. As these are can give you insight into value creation over the longer-term. It’s really close to Warren Buffett and competitive advantage-type thinking. I’m just adapting it for digital businesses.
But I’ve also been adding frameworks for core vs. adjacency growth. Detailed growth projections (plus optionality) can sometimes get you visibility into value creation in 3-5 years.
But want about near-term increases in value? Like within 6 months?
And that gets us to investors like Mario Gabelli and Carl Icahn.
I wrote about Mario Gabelli earlier this year. He is most identified with two important concepts:
- Private Market Value
These are both listed in the Concept Library.
Catalysts are the more relevant to this discussion as they are actions (such as acquisitions and spin-offs) that can create value for shareholders very quickly. Or at least they can make the share price go up quickly. If Warren Buffett hunts for companies first based on quality, Mario Gabelli hunts for companies first based on near-term catalysts. I wrote about him in:
In that post, I listed the catalysts he most looks for.
I argued his favorite catalysts are (likely):
- The day of the spin-off shares can go up a lot.
- You also get different P/Es in the new company.
- Event-driven arbitrage such as mergers, acquisitions and reorganizations.
- Gabelli stays on top of current developments in financial engineering.
- He has a history of jumping into disparate things like conversions to real estate trusts.
- He follows what PE firms and financiers are doing. He understands their latest playbooks and anticipates their targets.
- Gabelli stays on top of current developments in financial engineering.
- Consolidation in an industry with limited supply.
- Companies with land and assets that are undervalued.
Holding shares before one of these catalysts happens can get you a rapid return. So where does this apply to tech companies?
I am mostly looking for #1 and #2. I’m looking for spin-offs and mergers, acquisitions and reorganizations. Reorganizations and spin-offs tend to happen later in more mature tech companies. But aggressive digital companies (like Alibaba) can be very active in M&A. I am always looking for companies that might be targets for these larger companies. I think physical retailers are a great target at the moment.
Two examples of these types of special situations are:
- When eBay spun off PayPal in 2014.
- The attempted hostile acquisition of HP by Xerox in 2020.
And the key activist behind both of these situations was Carl Icahn.
An Intro to Carl Icahn
Carl Icahn is most identified with his early years as a corporate raider. In fact, he was its most famous and symbolic archetype.
Today he is called an activist and looks similar to a lot of hedge fund guys. But it’s the same basic approach. He has a long history of forcing management to do things that increase shareholder value, or at least share price. And he is notorious for taking on management teams that he feels are operating in their own interests. If Gabelli hunts for catalysts, Icahn is basically a living catalyst for corporate change.
And he has been fairly active in the tech space for the past +15 years. It is an industry where CEO’s often prioritize other things (such as changing the world, growing really fast, etc.) over shareholder interests.
A bit of background about Icahn.
He was born in 1936 and grew up in New York City. He had all the early indications of a big, big intellect. For example, he was a chess champion at an early age. He went to Princeton University where he studied Philosophy. And his final paper won the top award for Princeton.
At his parents’ demands, he then went to NYU School of Medicine, which he says he hated. After two years, he quit and joined the army. He later became a stockbroker in 1961 at 25.
In 1968, he started an arbitrage and options trading business called Icahn & Co. He focused on a Wall street niche with little competition – but also with enough complexity that it enabled various strategies. At that time, options were an obscure field with no formal market. Just a few companies trading them over the counter, with big margins.
Somewhere along the way, he heard that people were making a lot of money doing arbitrage. With his partner Alfred Kingsley, he started doing classic arbitrage – buying stocks, bonds, warrants and convertible debentures, often buying one and shorting the other. He also started a discount brokerage.
By 1979, he was a successful but still unknown guy working from a small office on Wall Street. But within a few years, he would catapult to the top tier of Wall Street.
Rise of the Corporate Raiders
In the fall of 1975, Icahn had begun to hash out a strategy for taking over undervalued companies (by their asset value). This was a move away from his Wall Street business of buying and selling. Like Mario Gabelli, he was aware of the unusual situation in the US markets at the time.
In the late 1970s and early 1980s, many public companies were trading at a discount to net asset value. This was the end of the era of conglomerates and of high inflation (which increases asset costs and may not be reflected in market price).
Many US companies at that time were also run by management that served its own interests. Or the interests of its employees. Or were just sort of bureaucratic. But in many cases, they were clearly not acting in the interests of shareholders. The argument about shareholder value vs. stakeholder value had not yet been settled.
Many firms at that time saw an opportunity to profit from inefficient, mismanaged and undervalued corporate assets. Most of the private equity firms were launched during this period. With a lot of focus on leveraged buyouts. But you could also buy entire companies, break them up and sell off the pieces. Those people started being called corporate raiders. Mario Gabelli also got started during this period, viewing all this activity as potential catalysts. Basically, there was just a lot of private purchases of public companies, often using debt.
Icahn’s rise as a raider and investor began in 1978, when he decided to start to invest in undervalued companies. His strategy was to target companies trading below their asset values and to “control their destiny”. This more or less meant seizing control from management that he thought was not doing what was necessary for shareholder value.
It is worth reading his original partnership letter at this time. Here are some excerpts.
“It is our opinion that the elements in today’s economic environment have combined in a unique way to create large profit-making opportunities with relatively little risk…a high inflation rate and a sharply declining dollar. As a result, the value of gold and goods in general has skyrocketed. An obvious corollary to this is that the real or liquidating value of many American companies has increased markedly in the last few years; however, interestingly, this has not at all been reflected in the market value of their common stocks…”
“…the management of these asset-rich target companies generally own very little stock themselves and, therefore, usually have no interest in being acquired. They jealously guard their prerogatives by building ‘Chinese walls’ around their enterprises that hopefully will repel the invasion of domestic and foreign dollars. Although these “walls” are penetrable, most domestic companies and almost all foreign companies are loathe to launch an ‘unfriendly’ takeover attempt against a target company…”
“…However, whenever a fight for control is initiated, it generally leads to windfall profits for shareholders. Often the target company, if seriously threatened, will seek another, more friendly enterprise, generally known as a “white knight’ to make a higher bid, thereby starting a bidding war. Another gambit commonly used by the target company is to attempt to purchase the acquirer’s stock of, if all else fails, the target may offer to liquidate.”
Icahn, the chess champion, was going to try to control the destinies of certain companies by:
- Trying to convince management to liquidate or sell the company to a white knight.
- Waging a proxy contest.
- Making a tender offer.
- Selling back his position to the company. This would later be termed “greenmail”.
And his target was self-interested management at asset-rich (thanks to inflation and laziness) companies.
- He would threaten their comfortable lifestyles and jobs.
- In response, they would behave better, sell out or buy him off.
With this strategy, he went on a tear and made his first fortune. And in the process, he became the top corporate raider and one of the most feared men in finance.
You can read all about his early exploits in the book King Icahn by Mark Stevens. Much of the above detail is from that book. Here is a list of his deals from the early years.
- 1979 – He invested $1.4M in Tappan shares. He made $2.7M in profit when it was acquired by Electrolux after a proxy contest.
- 1979 – He invested $2.3M in Saxon shares. He made $1.9M in profit when he sold stock back to company.
- 1980 – He invested $10.6M in Hammermill. He made $9.6M in profit when he sold stock back to company after a proxy contest.
- 1981 – He invested $8.3M in Simplicity. He made $7.3M in profit when he sold stock to an ally of a large shareholder.
- 1982 – He invested $13M in Marshall field. He made $17.6M in profit when it was acquired by BAT.
- 1982 – He invested $13.3M in American Can. He made $6.6M in profit when he sold stock back to the company.
- 1982 – He invested $4.4M in Anchor Hock. He made $3.0M in profit when he sold stock back to the company.
- 1982 – He invested $14.3M in Owens Illinois. He made $9.7M in profit when he sold stock back to the company.
- 1982 – He invested $14.3M in Dan River. He made $8.5M in profit when it was acquired by the employee stock ownership plan.
- 1983 – He invested $35.5M in Gulf Western. He made $19.0M in profit when it sold stock on the NYSE.
- 1983 – He invested $48.6M in ACF Industries. It was acquired by Icahn.
- 1984 – He invested $8.8M in J.P. Stevens. He made $6.7M in profit when he sold stock back to the company.
- 1984 – He invested $30.5M in Chesebrough-pond’s. He made $6.0M in profit when he sold stock back to the company.
- 1984 – He invested $21.6M in Pioneer. He made $12.6M in profit when he sold stock back to the company.
- 1985 – He invested $175M in Phillips Petroleum. He made $40.0M in profit when he sold stock back to the company plus restructuring.
- 1985 – He invested $26M in Uniroyal. He made $15.0M in profit.
- 1985 – He invested $90M in Trans World Airlines. It went private in a LBO.
His strategy was basically:
- Focus the market’s attention on the disparity in price and value.
- Threaten to take-over and take control from management.
- Someone – most likely management or a white knight – will buy you out.
His approach was to intimidate corporate management and capture the spread between asset and market value.
Icahn has since evolved into more of an activist and a hedge fund guy. But his starting point appears to always be a big gap between price and value. You frequently see him get involved after a big drop in share price.
Icahn is now, 85 years old, with a reported net worth of $17-22B. He is still majority shareholder of Icahn Enterprises, which is headquartered in Mt. Kisco, New York.
He has a long list of investments that can be studied. Some interesting ones that relate to tech (from Wikipedia) are:
- “In June 1997, Icahn took control of Marvel Comics in a rivalry with Ronald Perelman.”
- “In August 2006, Icahn bought stock in Take-Two Interactive, a video game publisher, and increased his holdings to 11.3% in 2009, becoming the company’s second-largest shareholder.”
- “In May 2007, Icahn lost an election for a seat on the board of directors of Motorola, despite owning 3% of the company.”
- “In May 2008, Icahn purchased a large block of shares in Yahoo!, and shortly thereafter threatened to start a proxy fight to remove “Yahoo’s board of directors in response to their rejection of a takeover bid by Microsoft. Instead, he forced an agreement to expand Yahoo’s board to eleven members, including Icahn and two others of his choice.”
- “In October 2012, Icahn reported a 10% stake in Netflix.”
- “By April 2013, Icahn accumulated a 9.2% stake in Nuance Communications.”
- “On August 2, 2013, Icahn sued computer giant Delland its board in an attempt to derail a $24.4 billion buyout bid by the CEO, Michael Dell, in favor of his own rumored forthcoming bid.”
- “In October 2013, Icahn held 4.7 million shares of Apple Inc.”
- “In January 2014, Icahn invested another half billion dollars in Apple Inc.”
- “Also in January 2014, Icahn pushed eBay to complete the corporate spin-off of PayPal. This started a proxy fight which was settled by April.”
- “On May 15, 2015, Icahn made a $100 million investment in Lyft.”
As for how to find catalysts that can rapidly create value in tech companies?
I follow Mario Gabelli and Carl Icahn. That is basically my approach. They are using their networks to hunt for the right opportunities for short-term gain. So I track their 13F filings. I also find it a great way to get a sense of what their catalyst-activist playbooks are.
Also Keep an Eye on Keith Meister of Corvex Management
One more suggestion. Keep an eye on Corvex.
Keith Meister is the 48-year old founder, Managing Partner and Chief Investment Officer of Corvex Management LP, an activist hedge fund. But prior to founding Corvex in 2011, he was the Chief Executive Officer of Icahn Enterprises L.P. He was basically Icahn’s right hand man and is arguably his protégé. In the past five years, he has occasionally partnered with Icahn on deals. He appears to be far more focused on the tech world than Icahn. But he has the same approach and fearless personality. In his latest 13F, he had major stakes in Alphabet and Apple. And additional holdings in Microsoft, T-Mobile and Netflix.
Thanks for reading, jeff
- Lessons from Mario Gabelli on the State as a Catalyst (Asia Tech Strategy – Daily Lesson / Update)
- Core vs. Adjacency Growth in Digital Businesses (Asia Tech Strategy – Podcast 104)
From the Concept Library, concepts for this article are:
- Activist Investing (Ques 5)
- Catalysts (Ques 5)
From the Company Library, companies for this article are:
- Carl Icahn / Icahn Enterprises
- Mario Gabelli / GAMCO
- Keith Meister / Corvex
I write, speak and consult about how to win (and not lose) in digital strategy and transformation.
I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.
My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.
This content (articles, podcasts, website info) is not investment, legal or tax advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. This is not investment advice. Investing is risky. Do your own research.