The Predators’ Ball (24 page)

Now that Icahn was launched into this new game, it was time for him to divest himself of his last meaningful partner, Fred Sullivan. From now on he would accept investors in his deals, but would share equity with no one (except Freilich, with his one percent). Fred Sullivan, the CEO of Walter Kidde, a small fire-extinguisher company that he had built into a major conglomerate, had met Icahn when Carl was a trainee at Dreyfus, and Icahn had become Sullivan's broker. In the early seventies, Kidde had invested in Icahn and Company and owned approximately 19 percent. “We sold back about one year after Tappan, at a profit for Kidde shareholders,” recalled Sullivan. “Carl wanted to buy it back.”

Asked whether he felt he had any choice, Sullivan replied, “Well, he could have just put it [the profits] all in another entity if we had refused. Carl is very clever. And we decided not to test him.”

On Icahn's modus operandi in those early raids, Sullivan remarked, “Carl didn't have the money to finish the deal. He genuinely thought that the price of the stock was undervalued, and he genuinely thought that the values could be realized. He bought on that basis. It was only later, when greenmail started to be excoriated, that he defended it on the grounds that these companies were poorly managed.”

And when Icahn descended upon his adversaries, the chief executive officers of his target companies, he must have seemed like a nightmare come suddenly to life. After Saxon, Icahn's next target was the Hammermill Paper Company. “Here's this poor guy from Hammermill [Albert Duval, its CEO], a real Ivy League guy,” said Sullivan, “and he's sitting there thinking that the world works the way it always has, with his golf club and his graduating class, and he never raises his voice—and all of a sudden, he's got Carl, who is such a fighter. It's terrible. Carl was a scourge in those days.

“Carl is a dedicated capitalist. He is
dedicated
to amassing capital. He decided that he wanted to make money. Now, a lot of us made that decision, but few are as dedicated to it as Carl.”

Seven years after Icahn appeared on his threshold owning approximately 9 percent of the company's stock, Duval spoke of him with a bitterness which made it seem like yesterday. “I formed the
opinion that this was not for us, in the first few minutes of my meeting with Carl,” Duval declared.

Asked what it was that was so quickly decisive, Duval replied, “He said he wanted to piece off the company. He said, ‘I'm only in this for the money. I don't know anything about the paper business. I don't care anything about the paper business. All I care about is the money, and I want it quick.' ” Duval added, however, that Icahn did not ask explicitly to be bought out. Had he done so, that could have hurt him later in a proxy contest, as the company could have used it against him to discredit all his claims of wanting to increase the company's value—and expose him instead as someone who had asked for greenmail. (“Everyone knew who Carl Icahn was in those days,” explained one securities lawyer. “When you're a greenmailer, you don't have to
ask
for greenmail.”)

“He said he wanted to get on the board,” Duval continued. “He wanted to force it [the company] to a merger. He said repeatedly that he had no interest in the paper business. Well, everybody that worked there did. As far as we were concerned, the company had a future as well as a past and a present—but Carl just wanted to parcel it out as fast as he could.

“I'm sure if I had said, ‘Here's your money, at a price over market,' he'd have taken it right then,” Duval added. Instead, Duval—with the help of takeover lawyer Joe Flom from Skadden, Arps—instituted anti-takeover measures, mounted his own proxy campaign, and sued Icahn, charging him with disclosure violations and fraud. Icahn filed a counterclaim, alleging violations in Hammermill's solicitation of proxies.

One of Duval's lawyers said, “Duval called Icahn's bluff. He said, ‘I'm not putting you on the board, I'm not buying you out, I'm not selling the company right now.' Icahn was a known quantity at that point. He was someone who had about ten to twenty million at his disposal. You didn't have to worry that he'd make a tender offer for the company—he didn't have the money. At ten or eleven percent of the company's stock, he was tapped out.”

One of Icahn's lawyers confirmed that Icahn was stretched to his limit in each of these early deals. “He was really a gambler—everything he had was in each of these deals. Each one got bigger, because he would plow the profits from the one before back in. And the leverage was enormous—so a loss would have been devastating.”

Icahn narrowly lost the Hammermill proxy contest. To make matters worse, it was discovered that he had voted about seventy thousand shares that he had borrowed, and then returned, after voting day. Icahn's defense was that he had been buying stock through the days just preceding the election and was afraid that not all of it would clear in time for him to vote it, so he had borrowed some in order to be sure he had the full voting benefit of what he owned.

Duval met Icahn in a hotel room in Erie, Pennsylvania, where Hammermill is located, not long after the voting of the borrowed shares had been discovered. Icahn had lost the contest, the company was not offering to buy him out at a premium, but he was sitting there with close to 10 percent of the company's stock—and settlement talks were at an impasse. “I used a lot of vulgar language,” Duval recalled. “I said, ‘You're the damnedest liar and cheat I know. We're going to take out a full-page ad in
The Wall Street Journal
and
The New York Times
that says, “Icahn Cheats.” '

“I walked to the elevator, and he followed me and said, ‘Please, come back, we'll talk.' ” Duval is convinced that it was that meeting—and that threat—that broke the impasse, since not long after that, at the end of July 1980, they were finally able to reach settlement terms. For the next year, Icahn was prohibited from engaging in a proxy contest with Hammermill, and he granted Hammermill a right of first refusal on the shares owned by the Icahn group; Hammermill paid Icahn $750,000 for his expenses.

Through the next year, Icahn mounted no raids. According to one former insider, he was “stymied,” because most of his capital was tied up. He and his investors had invested about $10.6 million in Hammermill stock. Then, when the standstill expired after a year, Hammermill bought him out at a premium. The price of the stock had risen considerably in the past year. Icahn made a profit of about $9 million over his initial investment.

Someone else might have been tempted to sell back without a premium after the debacle of the proxy contest, in order to free up all his funds. But, as one lawyer who has been opposite Icahn on a number of his forays pointed out, “Icahn's style in 1980 was a whole lot of bluff and bluster. His game was, ‘I will not be bluffed out.' For him to have sold out at market, after losing the proxy contest, he viewed—I believe—as a signal to the next ten CEOs: Fight the proxy fight, beat him, and he'll go away.

“In those days he never made any pretense to doing something socially beneficial. The Carl Icahn of 1980 was still trying to figure out how this game was played, and what he could get away with.”

For Icahn, the lawyer added, the game never became personalized. Icahn would make whatever attacks on management seemed to be required to win a proxy fight, and he understood that his opponents would unleash their armaments on him—but he seemed surprised when he saw how personal was his targets' animus for him. “If Carl had his druthers, these fights would have been like two gentlemen dueling—you take your best pokes, but when it's over why not go out and have a beer together?”

His targets, however, tended not to see Icahn's game as sporting. “People don't like to be challenged,” this lawyer commented. “Particularly kings in their own castles.”

I
N EARLY
1982, Icahn led a raid on the huge retailer Marshall Field that established him as a serious predator. He surfaced, as was his habit, with a little over 10 percent of the company's stock. But one day later Icahn and his group reported that they owned 14.3 percent. One week after that, they filed at 19.4 percent.

What had happened was that additional investors—including British financier Alan Clore, and Marvin Warner, then chairman of the Cincinnati-based Home State Savings Bank—had jumped on the Icahn bandwagon. After his group had acquired nearly 20 percent of the stock, Icahn executed a loan agreement for $20 million with Jeffrey Steiner on behalf of a small bank Steiner controlled in Paris, Banque Commerciale Privée. Under the margin rules (which allow one to borrow up to 50 percent of the purchase price of the stock), this would have enabled Icahn to buy $40 million of stock.

Marshall Field fought back with a lawsuit as Hammermill had, making the usual battery of allegations about violations of federal securities laws, but added something novel as well: a RICO (Racketeer Influenced and Corrupt Organizations Act) count, usually reserved for dealing with organized crime. It charged Icahn with having invested income derived from a “pattern of racketeering” to acquire his interest in Marshall Field, whose activities affected interstate and foreign commerce.

The complaint charged that this pattern (which was defined to include violations of securities laws) could be found in Icahn's history of infractions over the past decade. These were laid out in
detail. There was a consent order from the New Jersey Bureau of Securities, a censure from the New York Stock Exchange, a consent agreement with the New York Stock Exchange, an assurance of discontinuance from the New York State Attorney General's Office, and four decisions levying fines against Icahn and Company by the Chicago Board Options Exchange. And, finally, there was a consent decree Icahn had entered into with the SEC in 1981, alleging various securities law violations in Bayswater, Saxon, and Hammermill (involving the borrowed shares).

Marshall Field's legal battle was unavailing, however, and, within days of Icahn's securing the loan commitment from Banque Commerciale Privée, Marshall Field entered into a merger with Batus, Inc., the British retailer. Batus made a tender offer for all outstanding shares at $30 (Icahn's average cost per share was about $17). The aggregate cost of all shares purchased by the Icahn group was nearly $70 million, and Icahn had still not been tapped out. The bank loan of $20 million had never been taken down.

With over $100 million of buying power now at his disposal, Icahn was a more fearsome predator than he had been before. The business establishment took note. One close associate of Icahn recalled that Laurence Tisch, chairman of Loews and now of CBS Inc., said to him, “Tell Carl to cut this out. It's not good for the Jews.”

For Icahn, the deal had many satisfactions, and one was the settling of an old score. Back in 1978, when Icahn was just an arbitrageur, betting from the sidelines, Marshall Field had made such a successful anti-takeover maneuver that Carter Hawley Hale dropped its hostile bid for the retailer—causing the price of Marshall Field stock to plummet. Icahn had lost $100,000 in one day.

As much of a triumph as the Marshall Field raid was for Icahn, it soured him once and for all on having anything but passive limited partners. Before, he had formed limited partnerships of investors—college friends; his uncle, Schnall; his landlord at 42 Broadway, real-estate magnate Zev Wolfson. Some entered these partnerships for as little as $50,000, and Icahn charged a management fee of 20 percent; the partners had no say in the decisions Icahn made. But in Marshall Field, for the first time, he had formed a group with individuals who were more than passive: a Netherlands Antilles corporation called Picara Valley, controlled by Alexander Goren, Philip Sassower and Lawrence Schneider—the same trio who had bought Flagstaff from Nelson Peltz in the late seventies. They had introduced Icahn to Steiner, shortly before this raid.
When it was over, Icahn decided that in the future he would always insist upon having complete control and would never accept a partner who would not cede it to him. Neither Sassower, Goren nor Schneider has invested with him again.

Steiner, however, became Icahn's most constant and largest investor. He says he has no problem with Icahn's autonomy. “In this type of business, you can't be in a position where you have to get approval,” Steiner declared. “There has to be a captain. Carl is the captain. The key to these operations is being in control.”

After Marshall Field, the tempo of Icahn's raids quickened. Marshall Field had given him not only profits of about $17.6 million but a great boost in confidence. He moved from Anchor Hocking to American Can to Owens-Illinois in rapid-fire succession, bought out by each company at a premium over market within a week or two after his stock purchases. By the fall of 1982, Icahn had begun his battle with Dan River—a protracted, acrimonious fight, during which townspeople of Danville, Virginia, who had never owned stock in the company rose up to repel him, buying stock with money saved for vacations and retirement funds. The struggle finally ended in 1983 when management escaped Icahn by taking the company private in a leveraged buyout. Icahn's profit was $8.5 million. In the summer of 1983, Icahn pocketed a quick $19 million—his largest profit to that date—when he sold his Gulf + Western stock at the market price to an institutional buyer, in a sale arranged through Gulf + Western's investment-banking firm, Kidder, Peabody. To reap this profit, he had invested more than $35.5 million, more than twice his commitment to the largest investment he had hitherto made—$14.3 million in Dan River.

In June 1984, Icahn confounded many Icahn-watchers by doing what he had insisted, in the Marshall Field depositions and the Dan River litigation, he had wanted to do all along: he acquired his target. He could have sold his stock in a railcar-leasing company, ACF, to the company in a management-led buyout and made a handsome profit—but chose to top the bid and take the company, for $410 million. National Westminster Bank USA, which had extended a $20 million loan commitment to an Icahn raid in late 1981, now was the lead bank in loans that totaled $225 million. The rest of the purchase price came from the sale of a major division of ACF just before the acquisition (in what was a highly unusual maneuver) and the post-acquisition sale of another division.