El millonario Carl Icahn.Brendan McDermid (Reuters)
“If you want a friend, buy yourself a dog.” This phrase, attributed on Wall Street to the shark Carl Icahn, today acquires enormous significance. His investment firm, in which he controls 89% of the capital, has been left alone and has been struggling in recent weeks against the negative opinions of the investment and analysis company Hindenburg Research, whose public doubts about the stability and solvency of its investments are responsible for causing a stock market drop of more than 50% since the beginning of the year. Today in the middle of the session the titles plummeted around 20% and at the end of the day it marked a decrease of 13.83%.
Hindenburg’s complaint triggered an investigation by US federal authorities on May 3 that was devastating for Icahn Enterprises’ share price. Hidenburg is dedicated to finding companies in trouble, taking bearish positions and reporting suspected wrongdoing. If he manages to convince investors, the shares fall and the fund makes significant profits. Hindenburg is one of the most recognized bear firms and in the last year has been successful in attacking Indian billionaire Gautam Adani and Block, the current company of Jack Dorsey, the founder of Twitter.
But the reason for Thursday’s drop is not a new opinion from Hindenburg. It is due to the opinion made public by one of his staunch enemies on Wall Street, Bill Ackman, another great shark in the US market, founder of the hedge fund Pershing Square Capital, who in a extensive text published on his Twitter account has “denounced” the way Icahn runs his company and suggested that the stock still has plenty of room to fall after already hitting the lowest levels since 2009. Ackman, who has had conflicts with Icahn in the past, said his The company itself was neither long nor short, just “watching from afar”.
“Icahn Enterprises reminds me to some extent of Archegos, where counterparties were comforted by having relatively smaller exposures to the situation,” Ackman said, referring to Bill Hwang’s family office, which blew up spectacularly in 2021. “It’s enough that a lender breaks ranks and sells off shares or tries to cover before the house collapses,” Ackman said. “Here, the fool is the last lender to liquidate.”
Icahn and Ackman have a long history. The two were on opposite sides of a five-year battle over Herbalife, with Icahn buying shares in the company in 2013, months after Ackman took a short position in the company, calling it a pyramid scheme. The two publicly clashed multiple times, with Icahn attacking Ackman in lectures, television, documentaries, and online. Icahn emerged victorious as shares rallied and Ackman eventually sold his short position.
Hindenburg analysts released a report earlier this month arguing that Icahn’s shares were significantly overvalued relative to their underlying assets and that the company’s high dividends were not sustainable. Despite the complaints, Hindenburg did not allege irregularities in management or in the accounts.
“We have full confidence in the integrity of our presented financial statements and information,” David Willetts, chief executive of Icahn Enterprises, said during an analyst conference held about a week after the report. The company is “well positioned for future success,” he said.
In a 90-minute interview with Bloomberg on May 21, Icahn refused to directly contradict Hindenburg and his report, which his company has called “self-interested.” He said that he was focused on his latest target, Illumina, and that he had recently discussed on his board the possibility of seeking profitability in artificial intelligence. “People come up to me and ask, ‘How are you feeling?’ It may sound strange, but it doesn’t affect me much. It’s my nature,” Icahn said.
However, Ackman’s analysis is devastating “I am fascinated by Hindenburg’s views on Icahn Enterprises. There are some interesting lessons. For example, one learns from Icahn Enterprises that a controlling shareholder of a company with a small free float, who pays a high dividend, can cause his company to trade at a large premium relative to its intrinsic value. The net asset value markup creates liquidity for the controlling shareholder by allowing them to access margin loans secured by overvalued shares that can be used to finance investments.
Icahn Enterprises’ price premium has been sustained by a high dividend yield that is not supported by operating cash flows. Return is generated by returning capital to outside shareholders, which is in turn financed by selling shares of the company to investors.
“This system has worked for a considerable period, but it is highly dependent on the maintenance of the premium and the peace of mind of the lenders. Icahn’s shares in his own company are not a liquid asset, representing approximately 85% or more of the company’s outstanding shares. Stocks also reportedly make up 85% or more of his net worth, so he apparently doesn’t have a lot of outside resources to fall back on.” And he continues. “Sustained price gouging requires trust in Icahn and his company. If Icahn were to sell any shares, the share price would likely fall precipitously, as the overload of additional sales and the consequent loss of confidence would prompt other shareholders to exit before the deluge.”
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