Corporate Raider Carl Icahn's Empire May Be Falling Apart

At 87, Wall Street legend Carl Icahn could dream of spending eternal life in the firmament. 

For decades, he tormented corporate CEOs, becoming one of the most feared activist investors in the corporate world. The list of his victims is long and amounts to the who's who of big companies. A single example says it all about his methods. 

In August 2013, Icahn went after Apple  (AAPL) - Get Free Report after having acquired 27,125,441 shares of the iPhone maker. By the end of January 2014, his stake would have increased to 52,760,848 shares, equal to 0.9% of the company’s outstanding shares. The bet was worth $3.6 billion in total.

He demanded that Apple distribute its big war chest to its shareholders in the form of share buybacks. Faced with resistance from the giant based in Cupertino, California, he increased the pressure on CEO Tim Cook by threatening a proxy war at the annual shareholder meeting. 

$2 Billion  

A few months later, on October 1, 2013, Icahn tweeted: "Had a cordial dinner with Tim last night. We pushed hard for a 150 billion buyback. We decided to continue dialogue in about three weeks.”

The tactic was clear: the pressure would attract investors who would start buying Apple’s stock in anticipation of possible buybacks. Even though Apple did not buy back $150 billion of its shares as Icahn had demanded, the tech giant did $45 billion in buybacks in its fiscal year 2014. In April 2014 the board of directors increased the buyback authorization to $90 billion from its previous $60 billion.

Two years later, on April 2016, Icahn told CNBC that he had sold his entire Apple stake by March 2016. His 32-month Apple bet netted him $2 billion "within a few bucks.”

A Danger Called Hindenburg Research

The Apple episode sums up the activism of Icahn, who has become one of the most feared shareholder activists in American capitalism. But the billionaire, who built his fortune and his reputation on his audacity and his risky bets, now faces the most serious threat against his own empire. What is interesting to observe is that the danger does not come from a company but from a financial group which uses his own methods.

On May 2, the New York firm Hindenburg Research, notorious for being a short-seller -- taking bets that the stock price of a company will fall -- released a groundbreaking report accusing Icahn Enterprises L.P (IEP) of a "Ponzi scheme."

IEP  (IEP) - Get Free Report is a publicly traded limited partnership that operates like a holding company. Icahn owned 81.26% of IEP as of March 30. The stake was then valued at $14.6 billion. IEP has investments in seven primary segments: finance, energy, automotive, food packaging, real estate, home fashion and pharma.

Hindenburg said in its report that IEP's stock was overvalued relative to its underlying holdings. In addition, it said that the higher dividends that IEP paid were not sustainable.

"In brief, Icahn has been using money taken in from new investors to pay out dividends to old investors. Such ponzi-like economic structures are sustainable only to the extent that new money is willing to risk being the last one 'holding the bag'," Hindenburg said on May 2.

The short-seller didn't accuse the legendary corporate raider of wrongdoing.

"Mr. Anderson’s modus operandi is to launch disinformation campaigns to distort companies’ images, damage their reputations and bleed the hard-earned savings of individual investors,” Icahn Enterprises said in a statement on May 10, referring to Nathan Anderson, who runs Hindenburg. 

"But, unlike many of its victims, we will not stand by idly. We intend to take all appropriate steps to protect our unitholders and fight back.” 

It's the Fight of His Life

The same day, IEP, however, announced in a regulatory filing that the U.S. Attorney’s Office for the Southern District of New York had contacted Icahn Enterprises, seeking information about corporate governance, capitalization, securities offerings, dividends, valuation, marketing materials, due diligence and other disclosures.

In less than a month, the Hindenburg Report has done more damage to the Icahn Empire than any company or rival had managed to do in many decades. IEP's share price has been more than halved since the Ponzi scheme accusations. To be exact, the fall is 56.5% to $20.65 at last check. This represents nearly $10 billion in market value that was wiped out in less than just one month. IEP's market capitalization fell to $7.6 billion from over $17.5 billion on the evening of May 1, the day before the Hindenburg report was released.

The value of Icahn's stake, which was $14.6 billion as of Mar. 30, is only $6.2 billion at last check, a drop of more than $8 billion in two months.

Whether this is the twilight of someone who has been feared for decades on Wall Street is difficult to say at this time. What is certain is that the damage caused by Hindenburg's accusations has given voice to his "enemies." The billionaire financier Bill Ackman, with whom Icahn had harbored a visceral enmity, recently advised him to call on friends, if he has any, because the current situation could be his downfall.

"Taking advice from Ackman concerning short selling is like taking advice from Napoleon or the German General Staff on how to invade Russia," Icahn responded, according to a statement he provided to CNBC's anchor Scott Wapner.

Like a lion that has been injured by an unexpected shot from a hunter but continues to roar, Icahn has not yet said his last word. This may not be his last battle.