Carl Icahn and Activist Investing in Bad Companies

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Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM July 2019 PE Investment Committee Course Carl Icahn and Activist Investing in in Activist Investing Icahn and Carl Bad Companies Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM up - Second Check case? vs. vs. return? test? What is R&R ways ways to lose $ odds? level level thinking? against common Pass punch card What is the Exit? Do checklist for follow for checklist Do small or $) (for bet prime A psych)? (for bet action What is the worst outcome tree with What is time / effort • • Risk & Returns Ques & Returns Risk 9 8 man” Pause 2: 2: Pause Send to “noSend Ques What In 1 Effort edge or s Deal & Value Add Value & Deal sale? return? laybook 3 years? p Howmuch acquisition advantage? Who are the ? Howmuch can is your Alwaleed Barrack / Alwaleed ancial engineering and difficulty vs. . in 3 months? purchase and / or improve improve returns at 6. 3G 6. competing bidders? 7a approach lists 7b.Search year fin Howeliminate? operational value add 6 5 7 30%? how can Pause 1: Do 1: Pause external view, external company fall by by fall company Question 9 9 www.jeffreytowson.com ? ard? h good, good, ? activism ? ling? oo t sel mgmt or - is FEMs and sits and FEMs competitive competitive Catalysts & 4 steps & 4 Catalysts ad catalyst Is there a : questions a b advantage s or Too Hard? Too or Who CA a Is the company company the Is Why Why is it cheap Great, Good, Bad Bad Good, Great, 5 H Does it have a CA? a have it Does Marks: Investor behavior Investor Marks: reat, Is this company g 2c. CGTA and destiny ques destiny and CGTA 2c. FA? or Sellable RE Barrack: 2d. questions 15 Fisher’s 2e. 2a. Management 2b. 4 4d.Icahn: Anti 4d.Icahn: 4a.Klarman: 4b. 4c.Gabelli 2 Company Ques Company ? margin alue? Value and Price Ques Price and Value v chart term) the - of safety? What is the

short ntrinsic

Is the business

What is attractive attractive and / or

(company (company or asset)

3b. Graham: Criteria list Criteria Graham: 3b. 3a. Valuation 3a.

predictable predictable (in long or 1f. Marks: “Where are we?” we?” are “Where Marks: 1f. 1e. Munger: Psych list Psych Munger: 1e. 1d. Russo: 5 + “and then what?” then “and 5 + Russo: 1d. 1c. Porter: Five Forces Five Porter: 1c. 1b. Industry questions Industry 1b. 1a. Customer view Customer 1a.

1 3 Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 2 www.jeffreytowson.com Laureate the same physics.” the same good knows six or seven different seven different six or knows good theoretical representations for exactly exactly for representations theoretical Richard Feynman, Physicist and Nobeland Physicist Richard Feynman, “…every theoretical physicist who is any is any physicist who theoretical“…every - Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 3 www.jeffreytowson.com 15 min – Herc

Case: Hertz Break Advantage? An Ques #7: Have Case: Carl Carl Icahn

• • • • • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 4 Background - www.jeffreytowson.com Carl Icahn Icahn Carl His final paper won the top award for Princeton that year? that Princeton for award top won the paperfinal His

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After two years, he quit and joined the army. army. the joined and quit he years, two After 25. at in 1961 stockbroker a became later He At his parents’ demands, he then went to NYU School of Medicine, which Medicine, NYU School of to went then he demands, parents’ his At hated. he says he he studied Philosophy and graduated in 1957. graduated and Philosophy studied he Born in 1936 and grew up in New York City. City. York in New up grew and 1936 in Born where University Princeton to went He age. an early at champion chess A

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• • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 5 – and with complexity complexity withand – Background - www.jeffreytowson.com Carl Icahn Icahn Carl

The main players tried to block him out of the market (didn’t work). Not work).(didn’t marketthe of out blockhim to tried mainplayers The in Brazil. early Jorgeunlike Doing options trades at lower margins.lower at tradesDoingoptions At that time, options were an obscure field with no formal market. Just a Just market. formal field with no obscurean wereoptions time, that At margins. significant at OTC them trading companiesfew He focused on a niche with little competition little withniche on a focusedHe strategies. of lots enabled that

• • • • buying stocks, bonds, warrants and convertible debentures, often buying buying often debentures, convertible and warrants bonds, stocks,buying bets. Hedging other. the shorting and one With his partner Alfred Kingsley, he also started doing classic arbitrage classic doing started also he Kingsley, Alfred his partner With He began to emerge as a disruptor to the options market. options the to a disruptor as emerge to began He Co. In 1968, he started an arbitrage and options trading business called Icahn & called Icahn business trading options and an arbitrage started he 1968, In

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• • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 6 Background - www.jeffreytowson.com had an options business and a discounta and business options an had – and his friends argued against it. against argued friends his and – Carl Icahn Icahn Carl This was a move away from Wall Street buying and selling to pure to selling and buying Street Wall from away a move was This business • Within a few years, he would catapult to the top tier of Wall Street. Wall of tier top the to would catapult he years, a few Within undervalued companies. undervalued brokerage. takeover to a strategy out hashto began he 1975, of fall the In By 1979, he was a successful but unknown guy working from a small a from workingguy unknown but a successful was he 1979, By Street Wall on office He also started a discount brokerage. discount a started also He • • • • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 7 Vietnam War. Vietnam - www.jeffreytowson.com Early 1980’s Early energy crisis and post and crisis energy -

By and large, a successful decade for the USA. Space shuttle and and shuttle Space USA. the for decade a successful large, and By falls. Union The Soviet off. take computers period. Precipitated a recession in 1982 but tamed inflation and set stage for stage set and inflation tamed but 1982 in a recession Precipitated expansion and growth a steady US had the onward, 1983 From growth. President Reagan took office in 1980 and cut taxes and other things. things. other and taxes cut and in 1980 office took Reagan President The US in the late 1970’s had high inflation and unemployment. It was It unemployment. and inflation high had 1970’s late the in US The post also

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• This is About America in the Late 1970’s and and 1970’s Late the in America About is This Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 8 Over and and Over - which may not be reflected in be reflected not may which – www.jeffreytowson.com LBO Boom of the 1980’s of Boom LBO

good cash flow. Called bootstrap investments. Called bootstrap flow. cash good Additionally there was debt available so you could LBO the companies with with companies the LBO could you available so debt was there Additionally undervalued corporate assets. For example, you could buy entire buy could you example, For assets. corporate undervalued The raiders. pieces. the selloff and up them break companies, Many firms saw an opportunity to profit from inefficient, mismanaged and mismanaged inefficient, from profit to opportunity an saw firms Many and of high inflation (increases asset costs asset (increases high inflation of and price) market In the late 1970s and early 1980s, many public companies were trading at a at trading were public companies many 1980s, early and 1970s late the In conglomerates of era the of end the was This value. asset net to discount

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• This Was the Beginning of the Take the of Beginning the Was This Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 9 ups, were LBOs very - www.jeffreytowson.com , often using debt. companies and assets profitable in the early years. Basically in this period there were lots of private purchases of public Capital was founded in 1984, Carlyle Group was founded in 1987, While many focused on divestitures and break KKR was KKR was founded in 1976, Carson Welsh was founded in 1979, Bain Private Equity Took Off in this Period this in Off Took Private Equity • • • billion. deals with an aggregate value of $1.7 billion in 1980 and reaching its peak in 1988, when 410 buyouts were completed with an aggregate value of $188 LBO activity accelerated throughout the 1980s, starting from a basis of four founded. It was was It during timethis that most of the major private Western equity firms were • • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 10 trading below their asset their below trading ”. www.jeffreytowson.com control their destiny their control A PioneeringCorporateRaider A – and to “ to and values so) do to threatening (or control seizing meant less or more This shareholders. for things wrong the doing management from His strategy was to target companies companies to target was strategy His

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invest in undervalued companies. in undervalued invest junk bonds (aka cheap financing). cheap (aka bonds junk to start to he decided when in 1978 came an investor as rise Icahn’s Private equity firms, catalyst investors (like Mario Gabelli) and others and Gabelli) Mario (like investors catalyst firms, equity Private of arrival the by helped were Acquisitions firms. these target to began In the late 1970’s, many US companies were often run by management by run often were US companiesmany 1970’s, late the In that Or employees. of interests the Or interests. own their served that not were companies cases many in But bureacratic. of sort are just were shareholders. of interests in the managed

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• Carl Icahn Icahn Carl Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 11 www.jeffreytowson.com where the price of the fund was below that of the of that belowwas fund the of the price where Below Its Value? Its Below –

couldn’t they be activists in a company with undervalued assets? undervalued with company in a be activists they couldn’t individual individual stocks. why funds, mutual end closed in undervalued activist be could they If This fell out of his earlier deals, with analyst Alfred Kingsley, in closed Kingsley, Alfred analyst with deals, his earlier of out fell This funds mutual end

• • Ques 4: What Would a Company Be Priced Priced Be Company a Would What 4: Ques Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 12 however, however, making opportunities with with opportunities making - www.jeffreytowson.com real or liquidating value of many American American of many value or liquidatingreal intersetingly, this has not at all been reflected in the market value their of value market the in reflected been all at has not this intersetingly, common stocks...” relatively little risk...a high inflation rate and a sharply declining dollar. As a As dollar. and declining a sharply rate inflation high little risk...arelatively obvious An has skyrocketed. in general goods and of gold value the result, is that the this to corollary fewlast years; the in increased markedly has companies “It is our opinion that the elements in today’s have economic environment today’s in elements that the opinion is our “It large profit to create a unique way in combined The first partnership letter said: letter partnership first The Icahn Raises Money With a Partnership a With Money Raises Icahn • • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 13 Rich and and Rich - . Often the target company, if . Often the target company, rich target companies generally - www.jeffreytowson.com . They jealously . guard their prerogatives by whenever a fightfor control is initiated, it generally leads Management of Asset of Management the management theseof asset

known as a “white knight’ known to make a higher as a “white knight’ bid, thereby starting a bidding Another gambit commonly used by the target company war. is to attempt to purchase the acquirer’s stock of, if all else fails, the target to may offer liquidate.” “…However, “…However, to windfallprofits for shareholders seriously threatened,more friendly will seek enterprise, another, generally are loathe to launch takeoveran ‘unfriendly’ attempt against a target company…” interest beingin acquired building ‘Chinese around their walls’ enterprises that hopefully will repel the invasion of domestic Although and foreign these “walls” dollars. are penetrable, most domestic companies and almost all foreign companies … very ownlittle stock themselves and, therefore, usually have no

• • Undervalued Companies Was Their Target Their Was Companies Undervalued Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 14 rich (thanks to (thanks rich - www.jeffreytowson.com interested management at assetat management interested - “Control the Destinies” “Control

Threaten their comfortable lifestyles and jobs. and lifestyles comfortable their Threaten off. him buy or sellout better, behave would they response, In Trying to convince management to liquidate or sell the company to a to company sellthe liquidate or to management convince to Trying knight. white contest. a proxy Waging offer. a tender Making company. the to position our Selling back

• • • • • • feared people in finance. people feared He would shortly become the top corporate raider and one of the most the of one and raider corporate top the become would shortly He His target was self was target His companies. laziness) and inflation positions in ‘undervalued” stocks and then attempting to control the control to attempting then and stocks in ‘undervalued” positions by: in question companies the of destinies “It is our contention that sizeable profits can be earned by taking large taking by earned be can profits sizeable that contention our is “It

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• • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 15 www.jeffreytowson.com a dog.” a dog.” Carl Icahn (from King Icahn) Icahn Carl – “If you want a friend on Wall Street, get “If you wantWall a friend on Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 16 . He now has $40 billion $40 has He now . close to his 120 acre estate. acre his 120 to close – www.jeffreytowson.com Carl Icahn Today Icahn Carl Overall, he has had 25 years of 12% returns 12% of years had 25 he has Overall, in assets. revenue of $16B and net earnings of about $400M. about of earnings net $16B and of revenue York New Kisco, in Mt. Headquartered In 2017, his net worth was $16.6B. was worth net his 2017, In Enterprises, Icahn of (90%) Shareholder Majority and Founderis still He • • • • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 17 www.jeffreytowson.com Icahn. Highly recommended. Icahn. Highly These cases are from the book King are from the book These cases Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 18 Still run by a family member. More on Still run this. by a family member. www.jeffreytowson.com Stock depressed but turnaround was on the way. Tappan Case Tappan Co had just posted first loss in 40 years. Co had made a bad acquisition in heating and cooling. Co had been hit realby Appliances estate down follow cycle of 1975. real estate cycles. Undervalued usually means against liquidation or reproduction value (or book value). Company was trading at $7 but book value was $20 per share. Just a niche company Not and a great probablycompany. unsustainable against and GE Maytag and others. • • • • • • Bad management (Question 4): Uncertainty Uncertainty (Question 4). Tappan was hundreda year had It old three niche appliance Tappan company. characteristics that are common in early Icahn investments. (Question 3): Asset Undervalued Value by • • • • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 19 www.jeffreytowson.com Assets) With Bad Management Bad With Assets)

Maybe Maybe arbitragers start buying. Bankers start pitching to other potential buyers for company. Buy Buy $3M of shares. Get the street talkingpossibletakeover. Mgmt starts worrying about their jobsand lifestyle. Definitely not a takeover. Lion talking to zebra. Zebra Definitelyis not a takeover. unaware. A friendly phone callto President Donald BoughtBlasius. your A like some more stock.Would info. Might some buy more.

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Step Two: Step Two: Step One: In late 1977, Icahn began buying Tappan shares at $7.50. In late 1977, IcahnTappan began buying

Tappan Was Undervalued Company (with (with Company Undervalued Was Tappan •

• • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 20 www.jeffreytowson.com (with Assets) With Bad Mgmt Bad With Assets) (with Icahn begins to hunt for a buyer himself. a buyer for hunt beginsto Icahn heightens possible takeover talk. takeoverpossible heightens company. the of the destiny” will “controlis he threat His value. book of half is still about Stock Buy more shares (drip, drip, drip) which scares management more and more management whichscares drip) drip, (drip, sharesmoreBuy

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Tappan Case: Undervalued Bad Company Company Bad Undervalued Case: Tappan • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 21 Icahn This plays plays This control. mgmt for a board seat. seat. board a for interested. And not acting in acting not And interested. - www.jeffreytowson.com Says will issue preferred shares that will that shares preferred will issue Says threatens a proxy fight a proxy threatens (with Assets) With Bad Mgmt Bad With Assets) (with

Management withdraws their proposed issuance. proposed their withdraws Management

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Electrolux (white knight) buys the company for $18 (Outcome #3). (Outcome $18 for company the buys knight) (white Electrolux return. 250% a $2.7M, makes Icahn keeps buying more shares. more buying keeps Icahn shareholder interests. interests. shareholder Icahn response, In Preferred shares will dilute shareholders to keep to will shareholders dilute shares Preferred self is management idea that the into right Management strikes back. strikes Management shareholders). all other (and his lessen and control their increase

Tappan Case: Undervalued Bad Company Company Bad Undervalued Case: Tappan • • •

• • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 22 and and – will you buy – www.jeffreytowson.com over and take control from management. from control take and over - most likely management or a white knight a white or likely management most – Icahn is a Fighter and a Strategist a and a Fighter is Icahn Someone out. Focus the market’s attention on the disparity in price and value. and in price disparity on the attention market’s the Focus take to Threaten

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…by attacking its main cause, management behavior (Question 4). (Question behavior management cause, main its attacking …by The approach was to capture the spread between asset value and market and value asset between spread the capture to was approachThe 3)… (Question price His approach was proven. was approachHis

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• This is a Ultimately a Fight for Control Control for Fight a Ultimately a is This Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 23 Over Over - Threats www.jeffreytowson.com

to move towards a sale or liquidation. As the company was undervalued this threat alone could often move the stockprice up. Or prompt the management Threaten to take control of the board by being a big shareholder.

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His main tool was the proxy contest (a legal manuever). He didn’t actually have the capitalto buy these companies. He was buying shares, waging proxy contests and other maneuvers.

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• Icahn’s Early Deals Were Mostly Take Mostly Were Deals Early Icahn’s Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 24 Also depressed price. stock Also depressed www.jeffreytowson.com Baird & Warner Case Warner & Baird Real estate took a dive 1975. in a dive took estate Real a Was company. the family to run fourth the member John Baird CEO. gentleman other this and his between and business of interests of conflicts Lots companies. family Book value was around $8. Stock price was $14. value Book loans. real and construction estate $80M in in Most was end fund closed a Basically per share. worth likely was $22 it liquidated If estate. for real • • • • • • Bad management with conflicts of interest (Question 4): (Question 4): interest withconflicts of management Bad Recent uncertainty at company 4): (Question company at Recent uncertainty in offices and retail. A collection of assets. collection A retail. and offices in 3): (Question value by asset Undervalued Baird & Warner is a real estate company of investments 1850. Lots in founded company estate is a real Warner Baird & • • • • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 25 www.jeffreytowson.com

Baird & Warner Case (continued) Case Warner & Baird Find a buyer. assets. Sell off implicitly threaten the management and their lifestyle. To

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What does he do next? CEO CEO ignored him. He met with John Baird who askedhim why he was qualified to be on the Board. Icahn started buying his stock in 1978 at $8.50. When he had 20% of the stock, he petitioned for a seat on the board order in to:

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• • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 26 - www.jeffreytowson.com Baird & Warner Case (continued) Case Warner & Baird interested. takeover and liquidate. Can say do lets proxy, Can tell other shareholders management greedyis and self Can argue is a spoiledelitist group insulated from company’s ups and downs by their generous compensation.

• • • attack. The company then missed a dividend payment. Which heightened stock uncertainty and gave Icahn an opening to Publiclyidentifies several conflictsbetween John Baird and Baird Loans by a company management owned. Consulting & Warner. fees.

• • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 27 but over a 3 year time period. time year a 3 over but – www.jeffreytowson.com

Baird & Warner Case (continued) Case Warner & Baird Icahn would depend on management on how liquidation was done. wasliquidation howon management on depend would Icahn shares.his buy to 50% borrowedhad he And Says will liquidate at $19 per share per $19 at will liquidate Says

• • Management struck back. struck Management • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 28 www.jeffreytowson.com launches a proxy launches a proxy to replace the all board members

Baird & Warner Case (continued) Case Warner & Baird He ordered the liquidationof the company Used theincoming company’s cashfor his next investments.

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He won in 1979 and became Chairman. He then with his people. Icahn and other partners buy 34% of shares andstop the liquidationplan.

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• • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 29 Alfred Kingsley Alfred – www.jeffreytowson.com

He used 50% debt. And he probably personally got 20%of got the personally probably And he 50% debt. He used profits from partnership.the They paid him $10.5. He makes He 200%. They paid him$10.5.

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Question: Who’s money were they wereusing they him money to pay to go away? Question: Who’s “We hit on a hot streak…For a while there, all we had to do was call up up was call do to had all we there, hot streak…For a while a hit on “We us first.” called Some…even pay. would they and But co then made an offer to buy his shares at a premium to what he he to what at a premium shares his to buy offer an made But co then (i.e., greenmail). paid When he showed up to discuss, they threatened him with legal action. with legal him threatened they discuss, toup showed he When publicists. hire will And sue. will They In 1980, he had bought at $7.5 on margin over months. sixover margin on at $7.5 bought had he In 1980, Same playbook as Tappan. Undervalued company relative to assets. to relative company Undervalued Tappan. as playbook Same Saxon and the Emergence of Greenmailof Emergence the and Saxon

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• • • • • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 30 Sold stock back to Soldstock back to company. Soldstock back to restructuring. company/ Goes private inLBO How after proxy contest Aquiredby Electrolux Soldback to stock company. Soldafter back to stock proxy. company of shareholder. large to ally stock Sold Aquiredby BAT. Soldback to stock company. Soldstock back to company. Soldstock back to company. plan Aquiredby stock ownership employee on NYSE stock Sold Aquiredby Icahn. Soldstock back to company. Soldstock back to company. www.jeffreytowson.com $12.6M $40.0M $15.0M -- $2.7M $1.9M $9.6M $7.3M $17.6M $6.6M 3.0M $9.7M $8.5M $19.0M -- $6.7M $6.0M $35.5M $48.6M $8.8M $30.5M $21.6M $175.0M $26.0M $90.0M $2.3M $2.3M $10.6M $8.3M $13.0M $13.3M $4.4M $14.3M $14.3M Invested Invested Profit $1.4M Icahn Goes on a Tear a on Goes Icahn pond's /'84 - Source; King Icahn bookIcahn King Source; Trans World Airlines /'85 /'85 Airlines World Trans Phillips Petroleum /'85 Petroleum/'85 Phillips /'85 Uniroyal Chesebrough Pioneer /'84 ACF Industries Industries '83 ACF Stevens /'84 J.P. Dan River /'82 /'82 DanRiver /'83 Western Gulf Anchor Hock /'82 Anchor/'82 Hock /'82 Owens Illinois Marshall field /'82 field /'82 Marshall American Can/'82 Hammermill/‘80 /'81 Simplicity Tappan / 1979 / Tappan Saxon /‘79 Company /Year /Year Company Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 31 www.jeffreytowson.com King Icahn book) King Icahn all the money in the world.” the world.” in money all the

Brian Freeman (investment banker, (investment banker, Brian Freeman

If he lives long enough, Carl will have will Carl enough, long lives If he – “ Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 32

www.jeffreytowson.com King Icahn ram personality to exploit a to exploit personality ram - – establishment.” establishment.”

with a battering with a

“He has combined an extraordinary intellect intellect extraordinary an combined “He has glaring weakness in the American corporate American in the weakness glaring Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 33 www.jeffreytowson.com talking continually with lawyers, investment investment lawyers, with continually talking – 10 in advance. He does his own thinking and his own and thinking his own He does in advance. 10 - Fund and a Telephone a and Fund

This approach and personality seems ideal for this investment strategy. investment this for ideal seems personality and approach This He is said to expect the worst of people. Lots of distrust. Makes no Makes distrust. of Lots people. of worst the expect to is said He intimacy. or friendship of pretense Planning out moves 8 moves Planning out negotiating. bankers and others who are lined up in holding patterns. holding lined up in are who others and bankers champion. chess a and negotiator master A alone. mostly operates He Unlike Warren Buffett (an analyst) or Tom Barrack (a deal networker), Icahn networker), deal (a Barrack Tom or analyst) (an Buffett Warren Unlike telephone the on lives

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• In Practice, He Is a Chess Champion with a a with Champion Chess a Is He Practice, In Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 34 10 moves - always thinking 8 – www.jeffreytowson.com His goals His weak points His leverage How can I protect myself on all flanks? What if the opponent does this? What is the worst thing they can do?

Not Yet Famous But Widely Feared Widely But Famous Yet Not

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Following three checkpoints? He always assumes the worst case (Question 8). And he was a master strategist ahead of andCEOs their advisors. Ican had become known someoneas to be feared. He would not stop. could He not be intimidated.

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• • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 35 yield bond department in the late in the department bond yield - year period, a new record for U.S. U.S. for recorda new period, year - www.jeffreytowson.com yield (i.e., junk) bonds. junk) (i.e., yield - Bonds (and Michael Milken) Michael(and Bonds

income at that time. that at income His compensation, while head of the high the of while head compensation,His four billion in a $1 exceeded 1980s, LBOs. created a market for high for a market created facilitated which quickly, bonds of amounts large raise able to was He In early 1970’s, Michael Milken, while working at Drexel Burnham Lambert, Lambert, Burnham Drexel at while working Milken, Michael early 1970’s, In

This Also Had To Do With the Rise of Junk Junk of Rise the With Do To Had Also This •

• • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 36 over artist. - market, missed earnings, etc. - interest). www.jeffreytowson.com - Icahn Playbook Icahn up, liquidate, find strategic buyer, etc. Butup, no operationalfind or liquidate,managementstrategic buyer, - over over vulnerability: - Fighting management on the board and legally for control. A take managementFighting A on the board and for legally control. involvement. With TWA, he tried more operationalTWA, management.involvement. With Lead with proxy to take control of company. Lead with proxy to take control of company. Then break of interest, high salary, perks, self of interest, high salary, Buyable Buyable shares, misseddividend, managementbad behavior that can be pointed to (conflicts Mostly balance sheet analysis. Asset heavy companies. Not great Mostly companies.sheetbalance analysis. down cyclical Gap hopefully isheightened by uncertainty, But gap can which be mostly isfixed. from management behavior,

• • • • • • Identify gap between asset value and market price. Always Identify Always enter betweengap asset withvalue lowmarket and price. price.

Key Key skill: Capture Capture profit by transaction or financial engineering. Look Look for take

• 3.

2. 1. Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 37 T Boone, T – Other Other Players: Arbitrage buyers. Arbitrage buyers. Ivan Boesky. Catalyst investors (Mario Gabelli) Lawyers and Ivestment frenzy. Bankers (M&A Protection frenzy) Other raiders Irv the liquidator(passively ride or do a repeat hit) All look All at the company A Buy? that is now in play. threat if competitor buys it? Shareholders • • • • • • Company Management $$$ (buy $$$ high) (buy $ (buy low) $ (buy $$$ (buy high) www.jeffreytowson.com White White MBOs Knight Activist LBOs &LBOs Want Activist Win to Want $$$ $ $$$ $

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How Can Management Respond? Management Can How

Doesn’t each response get him paid and / or strengthen his argument with other shareholders? Greenmail? Find a buyer Issue shares Tender offer Tender Management buy Sellall or part of company or otherDo recap way or ESOP of taking control of shares

• • • • • • • • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 39 www.jeffreytowson.com 15 min – Herc

Case: Hertz Break Advantage? An Ques #7: Have Case: Carl Carl Icahn

• • • • • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 40 lower lower higheratvolumes averagecosts – www.jeffreytowson.com proprietary production capability / manufacturing cost advantagesproprietaryproductionmanufacturingcapabilitycost/ – captive customers / control over repeatover purchasescontrolpricing/ / customerscaptive – demandimbalance - Competitive Advantages (1 of 2) of (1 Advantages Competitive Tariffs andquotas Tariffs License environment) zoning,(antitrust, Regulation Patents Marketing logisticsDistribution/ Real estate? Manufacturing R&D IP orproprietarytechnology IP Laborcosts inputs Lower ofcost Specialresource costsortransportationLocation Searchingcosts supply Temporary Share of consumermindShareandofbuying habits Switching costs • • • • • • • • • • • • • • • • • • Government Advantages Government Economy of Scale Cost Advantages Cost Scale of Economy Production Cost Advantages Cost Production Revenue Advantages Revenue 4. 3. 2. 1. Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 41 with capitalcostswith high initial – , telephone UnionPay, American Express, Apple App Store Apple American Express, UnionPay, Wechat – www.jeffreytowson.com Facebook, Facebook, – nope. nope. Transitory. nope. – – One One dominant company in smallmarket – Tencent multiplayer gaming isone sidedand two sided. Tencent – sided network sided network effects sided MSPsand network effects - - Competitive Advantages (2 of 2) of (2 Advantages Competitive Lower Lower cost of capital Lower cost of labor Most government regulationsand tariffs Most brands. You can asset. buy a brand cash. an with It’s Most You brands. This can be copied. smarter. Being Most expertise. Can be copied over time. Two Combos Not a strict CA. But strong disincentive to new entrants. One • • • • • • • • • • MSPs and Network Economics Advantages MSPs and Network Economics Efficiency Efficiency of Scale and history of attackingnew entrants. Usually not Usually (but not always) a competitive advantage: • 6. 5. Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 42 www.jeffreytowson.com 15 min – Herc

Case: Hertz Break Advantage? An Ques #7: Have Case: Carl Carl Icahn

• • • • • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM up - Second Check case? vs. vs. return? test? What is R&R ways ways to lose $ odds? level level thinking? against common Pass punch card What is the Exit? Do checklist for follow for checklist Do small or $) (for bet prime A psych)? (for bet action What is the worst outcome tree with What is time / effort • • Risk & Returns Ques & Returns Risk 9 8 man” Pause 2: 2: Pause Send to “noSend Ques What In 1 Effort edge or s Deal & Value Add Value & Deal sale? return? laybook 3 years? p Howmuch acquisition advantage? Who are the ? Howmuch can is your Alwaleed Barrack / Alwaleed ancial engineering and difficulty vs. . in 3 months? purchase and / or improve improve returns at 6. 3G 6. competing bidders? 7a approach lists 7b.Search year fin Howeliminate? operational value add 6 5 7 30%? how can Pause 1: Do 1: Pause external view, external company fall by by fall company Question 9 9 www.jeffreytowson.com ? ard? h good, good, ? activism ? ling? oo t sel mgmt or - is FEMs and sits and FEMs competitive competitive Catalysts & 4 steps & 4 Catalysts ad catalyst Is there a : questions a b advantage s or Too Hard? Too or Who CA a Is the company company the Is Why Why is it cheap Great, Good, Bad Bad Good, Great, 5 H Does it have a CA? a have it Does Marks: Investor behavior Investor Marks: reat, Is this company g 2c. CGTA and destiny ques destiny and CGTA 2c. FA? or Sellable RE Barrack: 2d. questions 15 Fisher’s 2e. 2a. Management 2b. 4 4d.Icahn: Anti 4d.Icahn: 4a.Klarman: 4b. 4c.Gabelli 2 Company Ques Company ? margin alue? Value and Price Ques Price and Value v chart term) the - of safety? What is the

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1 3 Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 44 www.jeffreytowson.com Seth Klarman Seth - going to outperform.” going Every manager should be able to be able should managerEvery answer the question, “What’s your “What’s the question, answer can’t articulate it, you probably aren’t it, you probablycan’t articulate edge?” If you don’t have an edge and edge have an you don’t If edge?” Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 45 – focused on private equity real estate real equity private on focused www.jeffreytowson.com – Estate Investor Estate Invests everywhere from US, Europe, Japan to Turkey and Philippines and Turkey to Japan Europe, US, from everywhere Invests Since 1991, has invested in over 12,000 real estate projects worldwide projects estate real 12,000 in over invested has Since 1991, +$60B totaling Founder of Colony Capital Colony of Founder • • • Tom Barrack: the World’s Greatest Real Real Greatest World’s the Barrack: Tom Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 46 based on the the on based - www.jeffreytowson.com Michael Jackson’s House Jackson’s Michael Also Known as the Guy Who Bought Bought Who Guy the as KnownAlso value of the titanium in the retractable roof. retractable the in titanium of the value Japan’s Fukuoka dome (Japan’s major stadium) stadium) major (Japan’s dome Fukuoka Japan’s In Asia, he is also known as the guy who bought Raffles and Raffles bought who guy the as known also is he Asia, In • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 47 . such as such , www.jeffreytowson.com oriented business. oriented property deals. property - -

private equity firms stay away from property investments property from away stay firms equity private One of Tom Barrack’s Advantages Barrack’s Tom of One They are interested in buying low and selling high, not in running high, not selling low and in buying interested are They people in non leveraged buyout. buyout. leveraged 80% with deal compared in a 70% to 60% borrows typically Colony They can’t be leveraged the same way as a manufacturer that that manufacturer a as way same the leveraged be can’t They a in involved debts massive the back pay to cash enough off throws real estate investors don’t like operating companies operating like don’t investors estate real

• • •

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•

• • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 48 term phenomena. term They are patient patient are They noise that is very that noise - . — Klarman - term capital term - term results.” Klarman results.” term - term time frame when the world is putting putting is world the when frame time term www.jeffreytowson.com - Know Your Edge, Organize Organize Edge, Your Know – Around It and Stick To It To Stick and It Around biggest advantage is long is advantage biggest

so much pressure on short on pressure much so probably more important than any other factor in enabling a in enabling factor other any than important more probably long a take to manager difficult for most investors to tune out.” out.” tune to investors most for difficult is It success. investment to key real the is clients great “Having “few market participants are able to ignore short ignoreto able are participants market “few noise in fact, are, market the daily blips of The

• • Baupost Baupost Baupost’s Baupost’s investors. Klarman says every investor needs to think about an edge, but few do. few but an edge, about think to needs investor every says Klarman

• • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 49 . figuring out messy situations messy out figuring www.jeffreytowson.com Know Your Edge, Organize Organize Edge, Your Know – Around It and Stick To It (cont) It To Stick and It Around

financials analyst. Instead, we are organized by opportunity.” opportunity.” by organizedare we Instead, analyst. financials “We don’t have a pharmaceutical analyst, an oil and gas analyst, a analyst, gasoil and an analyst, pharmaceutical have a don’t “We investors are forced to sell. Good investors love to buy when the other the when buy to love investors Good sell. to forced are investors selling mode. in panic is party because they want safety, and that their fund mandates it. When a When it. mandates fund their that and safety, want they because such many removed, condition ‘safety’ (i.e. occurs downgrade Many pension funds and bond funds invest in high credit rating bond rating creditin high invest funds bond and funds pension Many They like distressed debt that has been recently downgraded. recently been has that debt like distressedThey

Baupost Baupost • • • Their second biggest strength is strength biggest second Their • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 50 Foreign Capability Access Political Local Local Capability Advantage? What is Your Edge / Your What is You Adding? You • What Value Are What Value Capital (Rep, Big, Big, (Rep, 3 Fast or Long) or Fast Mgmt - www.jeffreytowson.com

Margin of Safety (priceSafety of Margin relationship)?value why and seller Who’s cheap? catalyst? A

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Analysis

Psychology Information Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 51 around situation. - . good in many cases many in good www.jeffreytowson.com The 3G capital play. Great company with weak management. weak with company Great play. capital 3G The Long term capital? This is This Long capital? term competitors. Eliminates capital? Big into opportunity (critical) Fast capital?Can move quickly turn Or at for end Reputation? sellingHelpsof career. 3. 4. 1. 2. Capabilities? Political Access? Political Management? Reputable capital? Reputable Only 20% can be in top 20%. Need to eliminate the other 80%. Something to Something other the 80%. to eliminate Need in 20%. be top 20% can Only price. at best capital for growth or working capital just from away get Best if you know them exactly. exactly. them you know Best if hedge funds, funds). (mutual institutional against is Klarman against isreal estate buyers. Barrack 4. 2. 3. 1. • • • • Do you have an acquisition advantage? advantage? an acquisition have Do you Who are your competing bidders? competing are your Who

•

• Ques 7: What is your acquisition advantage? acquisition your is What 7: Ques Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 52 www.jeffreytowson.com Surgically

Jackie Chan is making movies in the USA in the movies making is Chan Jackie Arabia in Saudi being used now is drilling technology Canadian in Nigeria is arriving expertise underwriting Insurance Local cafes in South Africa are becoming Starbucks becoming are Africa South in cafes Local China in cars making are SAIC and GM Management expertise and Brainpower Products Brands Services Technology Customers

• • • • • • • • • • • • Such as: Such Capabilities include: Capabilities Capabilities Can Be Used to Add Value Value Add Can to Used Be Capabilities

• • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 53 www.jeffreytowson.com 15 min – Herc

Case: Hertz Break Advantage? An Ques #7: Have Case: Carl Carl Icahn

• • • • • Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 54 lower lower higheratvolumes averagecosts – www.jeffreytowson.com proprietary production capability / manufacturing cost advantagesproprietaryproductionmanufacturingcapabilitycost/ – captive customers / control over repeatover purchasescontrolpricing/ / customerscaptive – demandimbalance - Competitive Advantages (1 of 2) of (1 Advantages Competitive Tariffs andquotas Tariffs License environment) zoning,(antitrust, Regulation Patents Marketing logisticsDistribution/ Real estate? Manufacturing R&D IP orproprietarytechnology IP Laborcosts inputs Lower ofcost Specialresource costsortransportationLocation Searchingcosts supply Temporary Share of consumermindShareandofbuying habits Switching costs • • • • • • • • • • • • • • • • • • Government Advantages Government Economy of Scale Cost Advantages Cost Scale of Economy Production Cost Advantages Cost Production Revenue Advantages Revenue 4. 3. 2. 1. Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM 55 with capitalcostswith high initial – , telephone UnionPay, American Express, Apple App Store Apple American Express, UnionPay, Wechat – www.jeffreytowson.com Facebook, Facebook, – nope. nope. Transitory. nope. – – One One dominant company in smallmarket – Tencent multiplayer gaming isone sidedand two sided. Tencent – sided network sided network effects sided MSPsand network effects - - Competitive Advantages (2 of 2) of (2 Advantages Competitive Lower Lower cost of capital Lower cost of labor Most government regulationsand tariffs Most brands. You can asset. buy a brand cash. an with It’s Most You brands. This can be copied. smarter. Being Most expertise. Can be copied over time. Two Combos Not a strict CA. But strong disincentive to new entrants. One • • • • • • • • • • MSPs and Network Economics Advantages MSPs and Network Economics Efficiency Efficiency of Scale and history of attackingnew entrants. Usually not Usually (but not always) a competitive advantage: • 6. 5. Working Draft - Last Modified 04/23/2008 11:49:19 AM Printed 4/21/2008 4:27:01 PM Contact Info: Towson Jeffrey www.jefftowson.com