Posts Tagged ‘Carl Icahn’

Business Week has an article, Fighting takeovers by playing the debt card, describing Amylin Pharmaceuticals Inc.’s (NASDAQ:AMLN) attempts to fend off Carl Icahn through the use of a “Poison Put.” A poison put is a change-of-control debt covenant the effect of which is to require the borrower to pay back an outstanding loan if investors buy a sufficiently large stake in the company or elect a slate of directors. In this case, AMLN says it would be forced to pay back a $125M loan if Icahn’s slate gets control of its board, which could in turn cause it to default on up to $900M in debt. That makes AMLN an unpalatable activist target.

Business Week says the covenant is the “choice du jour” for an increasing number of companies seeking to avoid the attention of activists and raiders:

Many companies have such change of control covenants in their bond or loan agreements, among them J.C. Penney (JCP), Kroger (KR), Ingersoll-Rand (IR), and Dell (DELL). That’s not to say they would use them to ward off an Icahn. Nor is it clear how many companies are using these covenants to do so. But shareholder activists have little doubt that they have become a takeover defense. “[These change of control provisions] are designed to deter a proxy fight,” says Chris Young, director of mergers and acquisitions research for the shareholder advisory firm RiskMetrics Group (RMG).

Change in control provisions are nothing new. In fact they are a standard condition in most loan agreements:

Change of control provisions first began appearing in 1980 when corporate raiders started taking over companies and loading them up with debt. Concerned that these companies would be unable to pay back their loans, lenders insisted on covenants requiring them to repay their original lenders. These provisions became fashionable again during the private equity boom of recent years. Now, with credit tight, they have become a potent deterrent to corporate raiders leery of being forced to repay a company’s debt and then refinance the loans at higher rates.

What is new, however, is companies actively seeking the inclusion of such a covenant as a device to fend off a suitor, as Lions Gate Entertainment Corp. (USA) (NYSE:LGF) and Exelon Corporation (NYSE:EXC) seemed to do recently:

When JPMorgan Chase (JPM) extended Lions Gate’s revolving line of credit last year, the terms included a provision that triggers instant repayment if an investor buys more than 20% of the company’s stock. Since then Icahn has acquired 14% of Lions Gate. In late March, Lions Gate “strongly urged” investors-while taking no formal position-to scrutinize an offer by Icahn to buy $316 million in debt. (He could convert it into stock and boost his ownership stake.) In the same letter, Lions Gate, without mentioning Icahn, said it could be forced to repay both its bank debt and notes.

In another case, the giant electric utility Exelon (EXC) wants to buy rival NRG Energy (NRG) for $5 billion and is waging a proxy battle to elect nine members to NRG’s board. In a letter to shareholders, NRG warned that such an outcome would trigger “an acceleration” of its $8 billion of debt. Exelon General Counsel William A. Von Hoene Jr. counters that NRG is “using the debt issue as a threat” to scare off NRG’s shareholders from considering its bid.

AMLN shareholders aren’t taking it lying down. The San Antonio Fire & Police Pension Fund, an AMLN investor, has sued the company for agreeing to the poison put about the time takeover speculation began in 2007. For its part, AMLN says it has since tried unsuccessfully to get bondholders to waive a provision blocking outsiders from taking over the board and has asked its bankers for a similar waiver. Steven M. Davidoff, The Deal Professor, has a superb analysis of the issues in his NYTimes.com DealBook column, Icahn, Amylin and the New Nuances of Activist Investing. Says Davidoff:

The pension fund’s claim is mainly that these poison put provisions are void. In support of this claim, the plaintiff appears to be arguing that the provision violates the Unocal standard in Delaware, which requires that director action in response to a threat to the corporation not be coercive vis-à-vis stockholders.

In addition, the plaintiff claims that the poison put provisions violate Section 141(a) of the Delaware General Corporation Law which requires that the business and affairs of a Delaware corporation be run by the board. Here, the plaintiff claims that the poison put provisions hinder the board’s exercise of its fiduciary duties to ensure a free and fair election, since the directors cannot approve all nominees for election.

The more problematic issue is with the language in the credit agreement for the term loan. … [If] in a two-year period the board changes control due to a proxy contest, the provision is triggered. The actions of Mr. Icahn and Eastbourne, if successful, would do the trick.

So, we are left with the issue of whether this provision violates Unocal. The answer is likely no. Delaware has broadly interpreted the doctrine, and here there is an opening for a change of control to occur – it will just take two years. This conceivably could be only two proxy contests, and therefore I suspect will likely not be found coercive. After all if Delaware tolerates staggered boards, why wouldn’t it tolerate a provision which has a similar effect?

Shareholder activist Nell Minow says companies shouldn’t use the poison put if their object is to disenfranchise stockholders:

These are shareholder rights that can’t be negotiated away by someone else.

We agree. Unfortunately, as Davidoff points out, lenders do have legitimate reasons for asking for such a provisions: they want to know who they are dealing with. This means that lenders will keep proposing poison puts and boards will “avoid resisting” them because they deter shareholder activism.

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In Icahn Takes On Kerkorian in Big Las Vegas Showdown (subscription required), The Wall Street Journal reports that Carl Icahn has built a large position in the bonds of MGM MIRAGE (NYSE:MGM) and is pushing it to restructure in bankruptcy court. MGM is struggling to service approximately $14B in debt and fund payments on its $8.6B City Center project in Las Vegas. MGM is controlled by billionaire Kirk Kerkorian, who holds about 53% of MGM valued at approximately $900M (down from ~$15B in late 2007). Kerkorian’s stake would be wiped out in a bankruptcy filing, which gives secured debtholders priority over stockholders in relation to assets.

It’s an interesting play for Icahn. The WSJ reports that he and Oaktree Capital Management hold a “little less than $500M” face value of MGM bonds out of approximately $7B of the non-bank debt. According to the WSJ, Icahn has little leverage now, but that could change as the bonds fall due:

When MGM Mirage bonds come due in July and October, the bondholders could force a filing if the company is unable to make those payments. Or, if MGM Mirage were to try to tender an offer to repurchase its bonds to lighten its debt load, they could also block that move. “Right now, it is just, sit back and wait,” said a person familiar with the matter. “The company is in a jam.”

The WSJ reports that the company has some unusual debt:

Its $7 billion in bank debt isn’t secured by the kind of assets typically used as collateral, meaning banks can’t foreclose on any of it (sic) properties. Those properties are still generating cash and stand to see strong profits if the economy improves.

MGM’s bank lenders have two reasons to help it avoid bankruptcy: 1. A bankruptcy filing would put the banks “on par with bondholders, leaving the two groups to battle over the assets,” and 2. MGM can still offer its properties as collateral to the banks and so improve their position relative to the bondholders.

The WSJ says that Icahn and Oaktree aren’t working together and their strategies aren’t yet clear:

They could be angling for equity in the company inside or outside bankruptcy. They could also be after some of MGM Mirage’s storied casino assets or simply want to ride out a bankruptcy with the bet that the bonds will recover far more than it cost to purchase them.

If MGM Mirage tried to buy up those bonds, then Mr. Icahn and Oaktree could block such steps.

But the move could blow up on Mr. Icahn and Oaktree if the company is able to avoid bankruptcy or it cuts deals with bank lenders and provides them liens on MGM Mirage’s assets, which could depress the recovery rates for MGM Mirage bonds.

It’s an interesting situation, and one we’re going to watch closely. Hunter over at Distressed Debt Investing says “MGM bondholders are licking their chops about a possible debt for equity exchange” and is looking to build a MGM bond valuation model. We’ll let you know how he goes.

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In his blog, The Icahn Report, Carl Icahn argues in a new post, It’s Up to the Shareholders, Not the Government, to Demand Change at a Company, that “shareholders have been complicit in allowing management excesses and incompetence by not taking a stand.” Nell Minnow, editor and co-founder of the Corporate Library, agrees:

Shareholders have reelected these directors, have approved these pay plans and have been enablers for the addictive behavior of the corporate community.

Icahn asks, “Why should investors tolerate poor performance? Why should taxpayers?”

I have shaken up boards and managements at many companies in which I have invested, including Blockbuster, ImClone, Stratosphere, Philips Services, Federal-Mogul and many others. Generally, but not always, the net result has been very positive for the company and the shareholders. It is important to get new blood, new strategies and new ideas into underperforming companies.

Icahn laments the fact that it took a “force the size of the U.S. government” to change the board and management at General Motors Corporation (NYSE:GM):

In effect, the government has become the world’s biggest activist investor, making the same kinds of demands that any activist or creditor should rightfully make in return for its investment.

He concludes that he hopes that the “global economic meltdown” results in shareholders demanding more of their companies and not leaving it to the government.

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In an opinion piece for the New York Times titled, We’re Not the Boss of A.I.G., Carl Icahn argues that the legal “devices” that disenfranchise shareholders “can be found at the root of today’s financial crisis:”

The legal landscape is filled with devices designed by state legislators and courts to prevent shareholders from influencing how companies are run and so allow management free rein. Legal mechanisms known as poison pills, permitted under the laws of most states, effectively prohibit shareholders from accumulating a large position in a company or working with other large shareholders to influence the company.

Furthermore, public corporations may legally adopt a staggered board, whereby board members are grouped into classes, with each one representing about a third of the total number of directors, so that only one class comes up for election in a year.

This means that seriously shaking up a board would require at least two very expensive proxy contests over two years. And current state laws permit incumbent board members access to the corporate treasury, allowing them to spend millions of dollars, to hire lawyers and public relations firms, run ads and mail materials to prevent shareholders from adding their designees to the board of directors.

One problem identified by Icahn is complex “advance notice” requirements that enable companies to derail efforts to elect shareholder-nominated board members:

Although a majority shareholder like the government may be able to get its nominees onto the A.I.G. board without a fight, typically even a large shareholder must conduct an expensive proxy contest to elect its nominees – that is, he needs to solicit enough votes from other shareholders. This is accomplished by mailing a statement describing the shareholder’s positions, and a card on which to vote. At a large public company, mailing, printing and other costs can run into the millions of dollars.

Icahm has a typically straight-forward solution to the problem:

Those costs could be reduced, and the election process could be made more open, if the Securities and Exchange Commission would allow “proxy access.”

Proxy access would permit shareholders to solicit votes for the election of their nominees by including the names and other relevant information about those nominees in their company’s annual proxy statement, and thus save the cost of sending additional documents. But so far the S.E.C. has said no to proxy access for the election of directors nominated by shareholders, though its new chairwoman, Mary Schapiro, said on Thursday that the commission will take up the issue in the coming months.

Echoing his thoughts in an earlier essay published in the Wall Street Journal, Icahn also argues that allowing shareholders to vote by simple majority to migrate a company from its state of incorporation to more shareholder-friendly states would stop many of the abuses:

With some exceptions, our public corporations are increasingly unable to compete globally, they pay excessive compensation to top brass and they are generally unaccountable to shareholders. The best hope to change this situation is to allow shareholders the power to move the state of incorporation of public companies from one state to another. For example, North Dakota passed a law in 2007 that, among other things, provides for proxy access and for the reimbursement of expenses to a shareholder who runs a successful proxy fight. A move to North Dakota would greatly advance shareholder rights for any company.

But under current state law shareholders can elect to move their company to another jurisdiction only if the existing board of directors approves such a move — and those incumbent boards will want to stay in the management-friendly states they already inhabit.

Federal legislation could correct this absurdity and permit shareholders to move the corporations they own to another state by a simple majority vote. Such legislation would override the restrictions of state laws that prevent such a change of jurisdiction unless approved by the board of directors. Most important, it would encourage the states, which profit from the tax revenues that flow from corporations, to compete with one another by reorienting their laws on corporate governance to benefit shareholders.

According to Icahn, a possible silver lining to the A.I.G. mess is that it will “alert Washington to the lamentable state of corporate governance in America:”

Our legislators will find – as I have as a shareholder who has waged many battles to get on corporate boards – that the rights of the shareholders are quite circumscribed.

It is time to remove the many devices that managements use to entrench their power, and give shareholders real power. The “ownership” rights that the government, as a shareholder, is now talking about are the same ones that activist shareholders have been demanding for years.

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Carl Icahn contributed an article to the Wall Street Journal on President Obama’s plan to limit executive pay to $500,000 a year plus restricted stock for institutions that receive government funding. Icahn argues that while the response is “understandable,” the salary cap fails to address the root cause of the problem:

The real problem is that many corporate managements operate with impunity — with little oversight by, or accountability to, shareholders. Instead of operating as aggressive watchdogs over management and corporate assets, many boards act more like lapdogs.

Despite the fact that managements, albeit with some exceptions, have done an extremely poor job, they are often lavishly rewarded regardless of their performance.

Icahn goes on to explain that the problem is that boards and managements are entrenched by state laws and court decisions that “insulate them from shareholder accountability and allow them to maintain their salary-and-perk-laden sinecures.” He proposes a federal law that allows shareholders to vote by simple majority to migrate the company from its state of incorporation to more shareholder-friendly states. This power is currently vested in boards and management:

This move would not be a panacea for all our economic problems. But it would be a step forward, eliminating the stranglehold managements have on shareholder assets. Shouldn’t the owners of companies have these rights?

Now some might ask: If this policy proposal is right, why haven’t the big institutional shareholders that control the bulk of corporate stock and voting rights in this country risen up and demanded the changes already?

This is because many institutions have a vested interest in supporting their managements. It is the management that decides where to allocate their company’s pension plans and 401(k) funds. And while there are institutions that do care about shareholder rights, unfortunately there are others that are loath to vote against the very managements that give them valuable mandates to manage billions of dollars.

This is an obvious and insidious conflict of interest that skews voting towards management. It is a problem that has existed for years and should be addressed with new legislation that benefits both stockholders and employees, the beneficiaries of retirement plans.

I am not arguing for a wholesale repudiation of corporate law in this country. But it is in our national interest to restore rights to equity holders who have seen their portfolios crushed at the hands of managements run amok.

It’s vintage Icahn to suggest such a simple yet effective, market-based solution.

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We’re unabashed fans of Carl Icahn, who’s reputation for pushing up the stock prices of the companies he invests in has led to a phrase that describes his Midas touch: the “Icahn lift.” We’ve previously covered the billionaire investor’s antics in YHOO here. Our gift to you is 60 Minutes’ August profile on Icahn:

It takes a certain breed of stock market investor, the kind with lots of money and lots of guts, to thrive in queasy times like these, when the market keeps losing altitude. Carl Icahn is one of that breed.

He has a knack for turning someone else’s loss into profit for himself. But he can also help others improve their bottom line through the so-called “Icahn Lift,” an upward bounce that often happens when he starts buying a beleaguered stock.

To see the video, click here: (60 Minutes’ “The Icahn Lift”). Enjoy!

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