Smart Money: Feisty Icahn enters 2011 ready for battle

NEW YORK Mon Mar 7, 2011 8:31am EST

NEW YORK (Reuters) - Carl Icahn turned 75 last month, but the activist investor is a long way from riding off into the sunset.

On the contrary, the billionaire is shaking up corporations and dominating headlines with the same prowess he has shown for three decades.

Whether battling for control of power company Dynegy Inc, pushing cell phone and computing company Motorola to break itself up, or bidding for chip design software maker Mentor Graphics Corp, Icahn is on track for one of his busiest years ever.

But he says his recent spurt of activity simply reflects the feast or famine nature of his quest for undervalued companies.

"Most companies can do something to make themselves more effective and enhance value," Icahn said in an interview with Reuters. "These opportunities sometimes come not in a very orderly sequence, but you can get three or four that work well right at the same time."

With disclosed U.S. equity positions worth $13.2 billion, Icahn ranked fourth among the "Smart Money 30" group at the end of 2010, according to data compiled by Thomson Reuters. The group includes some of the largest stock-picking equity hedge funds, led by John Paulson's Paulson & Co and its $34.4 billion.

Hedge funds, which on average returned only 4.5 percent last year, have been betting that shareholder activism will be one of their winning strategies for 2011. Where strategies like classic long-short equity trading have stumbled in volatile markets, activists like Icahn and Pershing Square's Bill Ackman are seeing some of the strongest returns in the industry.

The Icahn Partners fund is up about 8 percent this year, according to a person with knowledge of the fund, beating the 5 percent rise in the Standard & Poor's 500 index. Icahn declined to comment on returns.

Strong bets on natural gas producer Chesapeake Energy and drugmaker Genzyme Corp have boosted the fund's performance recently.

FORCE FOR CHANGE

Over the past six months, Icahn's fund made more than $400 million on his bet on Chesapeake. The natural gas giant was an object of scorn two years ago for buying Chief Executive Aubrey McClendon's antique map collection for $12.1 million.

But since Icahn disclosed acquiring a 5.8 percent stake in December, the company has announced plans to cut spending, sell assets and reduce debt. That will slow expansion but improve profitability.

His activism at Genzyme eventually pushed the company to sell itself for $19 billion to Sanofi Aventis SA, generating about a $300 million gain for Icahn.

"Happily, our activism in these situations has worked very well," Icahn said. "We go in as activists, we change the landscape, and we're forces for change in every company we are involved with, one way or another."

When Icahn takes a new position in a company, the announcement typically triggers a 10 percent rise in the company's stock price, according to a study published by professors at Oklahoma State University and Texas A&M in December.

The study also found that Icahn was able to achieve at least one of his objectives for change in over half of the companies that remained independent.

Icahn, who began buying controlling stakes in companies in 1978, is perhaps best known for buying struggling companies out of bankruptcy, but as big bankruptcy filings have tapered off since 2009, there are fewer opportunities there.

Instead, he has focused on undervalued equities, said Thomas Lauria, head of the global financial restructuring and insolvency group at law firm White & Case, who has worked with Icahn on restructurings like WCI Communities, MGM and Marvel Comics. "He just seems to have a sixth sense for understanding a hidden value," Lauria said.

Power plant owner Dynegy is a recent example. Last year, Icahn and hedge fund Seneca Capital defeated a bid for the power company from private equity firm Blackstone Group. Icahn launched his own offer for the company, but Seneca complained that even Icahn's bid was too low.

Dynegy's management and board resigned last month after failing to sell the company. Icahn, who still owns a stake of about 10 percent, is seeking two seats on the board.

"The whole corporate governance system is dysfunctional, and as a result we in the United States are having trouble competing," Icahn told Reuters. "While there are some exceptions, there is not enough accountability. I think my making all these profits proves that."

Icahn declined to go into specifics about his strategy at Dynegy and other pending situations.

Not everyone is convinced that his bid to wrap himself in the mantle of good corporate governance bears scrutiny.

"When he actually owns a majority of the company, he does exactly the opposite of what he was just screaming about when he was a minority shareholder," said Scott McCarty, a portfolio manager at Q Investments who went to court against Icahn over telecommunications company XO Holdings Inc.

Q Investments has alleged in lawsuits that Icahn and his friends on the XO board have prevented several attempts to sell the company.

For his part, Icahn, who owns a majority of the company, says he has pumped millions of dollars into XO to keep it afloat, and offered other shareholders an opportunity to put in cash, but they declined.

"Without my injection of capital, I believe the company at this time would be insolvent," he said. "That has certainly helped other shareholders."

A SON ALSO RISES

Icahn can be quite persistent.

He was movie rental chain Blockbuster Inc's largest shareholder and served as a board member for years after winning a proxy battle in 2005.

As the company hurtled toward bankruptcy last year, he resigned from the board and sold his stock at a big loss. But he bought up a big position in the company's debt ahead of its bankruptcy, and he is considered to be a leading contender to bid on its assets at an auction next month.

Icahn is increasingly working with his son Brett, who has been a driving force behind recent positions in stocks like Hain Celestial and Clorox.

Brett, a Princeton graduate like his father, has been working with Icahn for a decade. The portfolio Brett manages with his partner, David Schechter, has seen a 50 percent return in the last eight months, Icahn said.

"There really is no nepotism. If anything, it's more difficult for him, but he's proven out really well," Icahn said.

Icahn shows few signs of surrendering the stage to the next generation entirely.

"I enjoy doing it," he said. "It's sort of like a chess game. I find it fascinating ... What else would I do?"

(Editing by Aaron Pressman and John Wallace)

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