Corporate raiders morph into nice(r) guys

Carl Icahn (C) greets people prior to a media conference on February 7, 2006 in New York City. Icahn used to buy companies and break them up. These days, he’s an activist investor, using large stakes to influence corporate strategy.

Netflix has been circling the wagons in a real-life drama. Billionaire investor Carl Icahn has acquired a stake of almost 10 percent in the movie-rental company, amid reports he wants to push the business into looking for a buyer.

There was a time not so long ago when Icahn might have just assumed the role of "corporate raider," and swept in to buy the company outright. These days, though, the idea of the "corporate raider" is frequently giving way to a kinder, gentler approach, and a more politically correct name: activist investor.

"The term 'raider' suggests short-term profits; the term 'activist investor' suggests longer-term value," explains Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. Elson says stockholders sometimes got burned when corporate raiders targeted companies, but institutional investors increasingly see activist campaigns as a helpful, constructive influence. "The more successful you are at convincing others that you're creating long-term value," Elson says, "the more successful you will be at ultimately profiting from the position you've taken."

Carl Icahn typified the corporate raider in the 1980s, buying TWA and selling off many of the airline's key assets before it went bankrupt. He's shifted to an activist strategy in recent years, buying up sizeable stakes and then pushing for changes at companies ranging from Chesapeake Energy to online giant Yahoo. Since 2006, Icahn has launched campaigns for changes in management at, or the sale of, more than 40 companies. His goal is to improve stock values.

"Telling the market how bad management is, telling them what changes need to be made -- things like that benefit all the shareholders," says Kenneth Squire, who tracks the corporate shake-up campaigns at the research firm 13D Monitor. He concedes, though, that the activists don't always succeed.

Hedge fund manager William Ackman bought a big stake in JC Penney, won a seat on its board of directors and hand-picked a new chief executive. The department store chain has continued to languish, however, under the leadership of his choice, former Apple retail chief Ron Johnson.

Still, Squire says institutional investors who've watched their stock market returns shrink in recent years are quick to embrace these activist campaigns -- and they're getting attention. "Boards and management are much more receptive to listening to activists than they used to be," says Squire.

In the past five years, activist investors have been successful in winning at least one board seat in over half their shake-up efforts, according to FactSet Shark Watch.

Using the power of persuasion might be easier than a full takeover, but Carl Icahn hasn't entirely given up on making buyout offers. He made an unsuccessful attempt to take over Clorox last year, then failed in a bid to shake up the company's board.  

Icahn is something of a hybrid, says attorney Joseph Johnson at the Boston law firm Goodwin Proctor. Johnson, who has represented both activist investors and their targeted companies, says unlike most activist investors, Icahn is still willing to take over a company himself.

Gordon Gekko aside, professor Elson argues that corporate raiders have actually been a positive influence. "The raiders paved the way for shareholder activism," he says. "It created a skepticism about management, and that wasn't a bad thing." 

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.

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