Private equity investor Carl Icahn speaks at the World Business Forum on Thursday, Oct. 11, 2007 in New York.MARK LENNIHAN/AP
Shares of Research In Motion Ltd. are rising on the rumour that activist Carl Icahn is about to announce he has taken a stake, but is that really a reason to cheer?
History shows it is, but not for long.
The shares of companies he targets generally pop, so there's short-term money to be made. After that, however, the picture is cloudier.
When Mr. Icahn has forced companies to go private or be acquired, he has a good record of generating shareholder value over a longer time horizon. But when the companies remain independent, the performance has been dismal on average, for the next 18 months.
There's a debate about whether that is due to Mr. Icahn or just the management of target companies themselves, but the numbers are the numbers: More than half the time, shareholders over the long term have brutal returns in Icahn-targeted companies.
The New York Times Dealbook took a long look earlier this year at Mr. Icahn's record, based on an academic paper that looked at his results.
The paper, "Is Carl Icahn Good for Long-Term Shareholders? A Case Study in Shareholder Activism," appeared in the Journal of Applied Corporate Finance.
It found that Mr. Icahn's announcement that he had taken a stake in the target firm drove a gain of "on the order of 10 per cent" in the target's stock. However, after that, it's a tale of two outcomes. More than a third of the targets were taken private or taken over, with "significant positive stock market returns" in the 25 per cent range, on average. But for the other portion of close to two thirds of targets, the paper's authors found "very negative (- 60%) returns" in the 18 months after Mr. Icahn's stake is made public.
Why were the returns so weak? The authors give Mr. Icahn the benefit of the doubt, saying that it could be that the targets performed so poorly because they fended him off without enacting his plans.
The Times article concludes that as an activist, if you define that as something that creates long-term value, Mr. Icahn's record could be found wanting. "What this all means is that short-term arbitragers betting on a sale should side with Mr. Icahn. But long-term shareholders should view him as a riskier venture."
(Incidentally, Mr. Icahn responded to the article by saying he found it "somewhat amusing," but "disturbingly inaccurate." You can read his rejoinder here.)