Many investors were taken by surprise when Icahn Enterprises Inc., led by Carl Icahn, announced its decision to cut its quarterly distribution in half. While this move disappointed unit holders, it actually had a positive impact on the company's bonds.
For bondholders, ensuring a company's ability to meet interest payments and repay the principal is crucial. As a result, the decision to reduce the distribution from $2 to $1 was seen as a responsible move by the company.
This announcement coincided with the company's unexpected loss in the second quarter and a substantial decline in revenue amounting to $1 billion. The poor performance was attributed to Hindenburg Research, a short seller that published a report on Icahn Enterprises on May 2. The report accused the company of overvaluing its assets and revealed that Carl Icahn himself had borrowed from the company.
Following the news, Icahn Enterprises' stock experienced a significant drop of 24%, marking its largest one-day selloff since going public 36 years ago. This decline was only second to the 20% drop recorded on May 2 when the Hindenburg Research report was released.
Data-as-a-service provider BondCliQ Media Services observed an increase in bond buying immediately after the announcement, with buyers emerging after 8:00 a.m. Eastern. However, some sellers also appeared by midmorning.
The table below highlights the net buying activity over the last 10 days, particularly focusing on the 6.35% notes set to mature in 2026.
In a letter addressed to unit holders, Carl Icahn acknowledged mistakes made over the past few years as the company diverted from its core activist strategy and engaged in unnecessary shorting.
Activism: A Profitable Investment Paradigm
In a recent admission, renowned activist investor Carl Icahn acknowledged that his bearish market outlook and overzealous short positions have overshadowed the profitability of his activism efforts. He explained, "While we made money on the long side through our activism efforts, our returns have been overwhelmed by our overly bearish view of the market and related oversized short (hedge) positions." However, Icahn now plans to reorient his investment strategy by reducing his hedges and focusing primarily on his activism endeavors, all while maintaining a suitable level of hedging.
The Accountability Gap in Corporate America
Icahn firmly believes that activism offers the most promising investment paradigm, pointing out the lack of accountability prevalent in Corporate America. He argues that the majority of CEOs are incapable of fostering successful businesses or even enhancing existing ones. Moreover, he claims that many CEOs ascend the corporate ladder not because of their talents or suitability for the job, but rather due to their agreeable nature and lack of threat to superiors.
CEOs in a Country Club Bubble
Highlighting the detached nature of many CEOs, Icahn suggests that they often prioritize leisure activities over improving their organizations. He paints a picture of CEOs indulging in distractions at the proverbial country club, oblivious to the potential improvements and hidden opportunities within their companies. This lack of awareness ultimately hinders growth and innovation.
The Challenges of Activism
Unseating CEOs through activism campaigns is an arduous task, as they possess the ability to stack their boards with loyal allies and leverage company resources to combat such campaigns with expensive legal and financial experts. These tactics often deplete company funds, making it even more challenging for activists to achieve their goals.
Icahn's Success Stories
Icahn has a long history of launching and sustaining successful activist campaigns against various companies and their management teams. Notably, his recent efforts led to a management shakeup at gene sequencing test maker Illumina Inc. He firmly believes that his past activism campaigns have generated substantial value for shareholders and facilitated untapped potential. Examples of these successful campaigns include Reynolds, Netflix, Forest Labs, Apple, CVR Energy, Herbalife, eBay, Tropicana, Cheniere, and Occidental.
For more information on Carl Icahn's admission regarding his shortsighted market position that resulted in a $9 billion loss, see here.