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Carl Icahn’s battle for Time Warner has just intensified. Icahn, the corporate takeover specialist attempting to win control of the media giant, yesterday laid out his plan to break it up into four separate companies and buy back $20 billion in stock — all part of his latest crusade to oust management for the benefit of shareholders.
Icahn’s proposal would increase the value of Time Warner stock by about $40 billion, or nearly half its current market value, according to a 343-page report outlining his prescription for the troubled media conglomerate prepared by investment adviser, Lazard Ltd.
The report raises the stakes in the battle between Icahn and Time Warner CEO Richard Parsons, whom Icahn blames for management missteps and operating a company that is “bloated” with excess costs. “A great company in the media business needs visionary leaders, not a conglomerate structure headquartered in Columbus Circle that second guesses,” Icahn said after releasing the report.
Icahn’s comments echoed those he delivered during a speech at the February 1 Wharton Economic Summit in which he denied that he is an “imperial shareholder” out to rip companies apart for short-term gain, but instead, is eager to rid poorly performing companies of ineffective managers enjoying lavish perks. “The person who buys the company should be able to make it more productive than the current managers,” said Icahn. “Liquidation doesn’t mean you are taking it apart. It means you are going to make the assets more productive.”
Icahn, the billionaire veteran of takeover battles at Kerr-McGee, TWA, Texaco and USX, was responding to remarks made earlier at the New York City summit by Martin Lipton, founding partner of the corporate law firm Wachtell, Lipton, Rosen & Katz. Lipton argued that a new breed of aggressive shareholder is pressuring companies to produce short-term gains at the expense of the long-term growth of their firms and the broader economy. Lipton, who invented the corporate poison pill against hostile bids in 1982, spoke on a panel titled, “After the Corporate Governance Revolution: The Imperial Board of Directors.”
In the years following the scandals at Enron, WorldCom and other companies, Lipton said that the power in corporate governance has shifted from imperial CEOs to imperial boards of directors. “Now we may be at the brink of another change in history to the imperial stockholder. Over the last four years, there has been a tremendous increase in the power of shareholders to influence boards. That’s reflected in the [actions] of activist investors.”
As a result, long-term growth is at risk, he said. “Today, management and boards, when considering corporate strategy, must take into account that if investments are made for the long term, there is almost always an impact on short-term results. Earnings may not go down as a result, but they don’t go up as much as they would have. That pressure has a significant impact on the ability of the company to invest for the long term.”
According to Lipton, hedge funds, pension funds and shareholder organizations such as Institutional Shareholder Services (ISS) are pressuring companies to change their strategies, to seek buyers for all or parts of their companies, to buy back stock or to increase dividends. The pressure has been so strong that boards have gradually diminished hostile-takeover defenses.
“Today there is significant pressure on boards to be responsive to shareholders and particularly responsive to aggressive shareholders,” said Lipton. “Most companies are prepared to resist that kind of pressure if they are correctly operating, but those companies that have suffered a decline in the price of their stock and whose operations are in trouble, are more and more responding to those actions that the aggressive shareholders have urged.”
Exactly as they should, said Icahn. “We need to shake these guys up. Marty Lipton talks about the imperial shareholder and that really is an insult. Look at companies today and the fact that CEOs make 430 times what the average worker makes. Look at the record of these guys. Marty Lipton protects these guys when they go around on their jet planes [even though] the company hasn’t done anything for [the past] four years.”
Poison pill defenses would make “Machiavelli blush,” noted Icahn, adding that during various takeover campaigns in the past, he was attacked by lawsuits, public relations campaigns, dilution of his shares, and threats that his children would not get into the private school of their choice. He likened management to the caretaker on an estate who refuses to allow the owner to sell in order to protect his [the caretaker’s] own job.
Survival of the Unfittest
If Icahn, who leads an investor group that owns about 3% of Time Warner, is successful in evicting Parsons from Time Warner’s executive suite he would form four separate public companies — America Online; Time Warner Cable; the publishing unit with its flagship Time Magazine; and the company’s film and television business.
At the Wharton Economic Summit, Icahn suggested that Time Warner’s corporate headquarters staff is a drag on the company. “This conglomerate concept really doesn’t work. It didn’t work in the 1970s or in the 1980s. There is no synergy,” especially when the conglomerate includes “a bunch of people who not only spend a lot of money, but are counterproductive. The actual people who run these companies and operations are much better off not having to check what they are doing.”
Icahn laid out his view of a typical CEO’s ascendancy in the corporation: The future CEO is similar to the president of a college fraternity — a likeable fellow who is politically astute, but unlikely to take bold actions. The CEO is a survivor who is able to rise through the ranks at a corporation by never offending anyone, even if that comes at a cost to shareholders. And because they are not the type to rock the boat, rising CEOs are selected and groomed by incumbent CEOs who do not perceive them as a threat. “You have survival of the unfittest,” said Icahn.
His job, he added, is to buy companies cheaply and study the firm’s structure and operations to explore the reasons for any disconnect between the company’s stock price and the true value of its assets. “For the most part, the reason for this disconnect is management. If you get rid of them, you’re much better off. I’m not talking about every management,” he acknowledged. “There are good ones, but many of them are way below par. It is anti-Darwinian the way we select CEOs in this country.”
Icahn suggested that Lipton does not understand the economics of the stock market. “We want these assets to be productive. We buy them. We own them. To say we care only about the short term is wrong. What I care about is seeing these assets in the best hands.” A good manager, he added, is not penalized for investing in capital equipment because if it is done right, after depreciation, there is little impact on earnings. Research expenditures are also valued in the share price. He pointed to Tyco as a company with a low share price because it has skimped on research.
Hedge Funds’ Short-term Horizons
Lipton, in his earlier remarks, described the pendulum as swinging in Icahn’s favor. He pointed to the movement to majority voting, Internet proxy solicitations and the willingness of hedge funds to spend millions on lawyers and bankers to lead a proxy fight. “I don’t think we have come close to the top of the swing of the pendulum. I don’t see much reaction, just the opposite. Everybody is applauding” Icahn’s aggressive shareholder stance, “saying ‘Isn’t that great.’ In the long run I think it’s a disaster for the economy as a whole because it alters long-term investment.”
Lipton spoke on a panel with Arthur Collins, chairman and CEO of Medtronic, the Minneapolis medical device firm, who said it is the role of the board and the CEO to ensure the long-term health of the company for a range of stakeholders. “I don’t think it’s the CEO’s responsibility or the board’s responsibility solely to manage the company for the benefit of shareholders,” said Collins. “While that’s extremely important, there are other constituents who are important — employees, customers and in our case, patients.”
He pointed out that, by definition, hedge funds have a short-term horizon. They will press for short-term performance, “which requires you to have a very strong board that is willing to do what’s right for the company, the shareholders and the employees over the long term. I think more regulation of hedge funds is overdue.”
Icahn did agree with Lipton that a major change is underway in corporate governance that will result in more accountability for CEOs. Greater transparency in mutual funds, he said, is part of the reason. “Mutual funds before never liked to vote against the incumbent management. That is changing.” He also agreed with Lipton that hedge funds are a major factor in the movement toward greater pressure on management. “Hedge funds do take large positions and they, unlike mutual funds, are very, very oriented to how they are doing and to the performance of the company. They do their homework.”
When it comes to the rise of hedge funds, he came close to agreeing with Lipton and Collins. “I’m not saying it’s a good thing for the economy. I think it’s gone a little too far perhaps. But basically, hedge funds are very important. With these secular changes going on, I can only hope there is going to be a complete change in accountability.”
And that, he contends, will benefit the economy as a whole. “If there is a change in accountability, many of our assets are going to perform better. This is the only way we are going to compete in the future.”