Carl Icahn's Investing Strategy

Carl Icahn is one of Wall Street's most successful figures . In the 1980s, this corporate raider - using Drexel Burnham's junk bonds - became known as a vulture capitalist , taking positions in public corporations and initially demanding extreme changes in both their corporate leadership and management styles. Often, targets paid him " greenmail " money, with the stipulation that he would step away from his target. By the end of the 20th century, his reputation changed and he was starting to be described as a shareholder activist .

Investors followed his lead and bought into the businesses Icahn set his focus upon. The increase in stock price caused by the anticipation that Icahn would uncover shareholder value became known as the " Icahn lift ."

In this article we'll take a closer look at Icahn and his "lift" phenomenon's impact on the market and investing world.

Investment Philosophy
Icahn has stated, "My investment philosophy, generally, with exceptions, is to buy something when no one wants it." More specifically, as a contrarian investor he identifies corporations with stock prices that are reflective of poor price-to-earnings ratios (P/E ratio) or with book values that exceed the current market valuation.

Icahn then aggressively purchases a significant position in the corporation and either calls for the election of an entirely new board of directors or the divestiture of assets in order to deliver more value to shareholders. The compensation of CEOs is a subject on which Icahn focuses publicly, as he believes that many are grossly overpaid and that their pay has little correlation to stock performance.

Beginnings
In 1979, Icahn's first victory was the takeover through a proxy vote of Tappan Company. Soon after winning a seat on the board, he engineered the sale of the company in a transaction that doubled his initial investment. Soon after, he would target Marshall Fields and Phillips Petroleum, both of which yielded him enormous returns as the companies fought to stave off his control.

TWA was the pinnacle of Icahn's early endeavors. In 1985, he took over the airline once controlled by Howard Hughes. Soon after, TWA bought several small regional carriers, as Icahn sought to use the broadened airline's efficiency to generate greater profits. In 1988, he took the company private through a $650 million stock-buyback plan that allowed him to regain almost his entire $469 million investment. This also saddled TWA with $540 million in debt. Soon after, the airline's most prized routes would be sold to competitors, leading the weakened business to declare Chapter 11 in 1992 and Icahn's leaving the company at the beginning of the following year.