Monday, March 10, 2014

Ebay’s Got the Guy Who Helped Pioneer the World Wide Web, the Guy Who Created the Online Auctions Business, the Guy Who Helped Steve Jobs Save Apple, the Guy Who Dreamed Up Quicken, and the Guy Who Turned Around eBay on its Board; Who’s Icahn Enterprises L.P. Got?


 Carl Icahn is—and he likes to be told this—a great investor.
 Billions of dollars of value—literally, billions—have materialized not just in Carl’s own pocket and those of his fellow investors in Icahn Enterprises L.P., but also in the Charles Schwab and Fidelity Investment accounts of investors across America, thanks to Carl’s prodding, poking and pushing around of companies that show up on his value screen.
 They can be great companies with enormous cash piles and technology smarts such as Apple, which Wall Street suddenly worries will become a has-been like, say, Motorola; and they can be once-great companies like Motorola itself.
 And they can be companies like eBay that are still growing, still generating new users every day, and still throwing off cash—both from its famous online auction business (the “eBay” side of the company), and from its less famous, behind-the-scenes payments business (the “PayPal” side of the company)—but where splitting up those businesses might put even more money in Carl’s pockets.
 Carl got into eBay the way he often gets into his targets: buying options on eBay stock “in size,” as traders say, late last year.  He now controls, we are told, 2.2% of the company. 
 And small though that position is, Carl is doing what he always does when he buys into a target: he is whining.  Big time.   In letters, in tweets and on CNBC.
 More than that: he is attacking the behavior of not only eBay’s CEO, John Donahoe—the man who engineered the turnaround of a company that many on Wall Street had left for dead at the hand of Amazon.com years ago—but of Donahoe’s fellow eBay board members, including Marc Andreessen, the genius who helped launch Netscape, Scott Cook, the genius who created Quicken, and Pierre Omidyar, the genius who created eBay.  Oh, and Fred Anderson, the genius who helped save Apple during its own dark days… 
 Now, the average outsider might think eBay shareholders around the world are overjoyed at Carl’s sudden attention to their company.  After all, the stock is up about 9% since his investment became public—thereby “creating value for shareholders,” as Wall Street types like to say.  
 And Carl himself sites an investor survey conducted by “Bernstein Research” confirming that “a majority of eBay shareholders responding to the survey” are on his side when it comes to ridding eBay of what he depicts as a corrupt, self-dealing, Machiavellian board.  
 After years of being lost in the wilderness, it seems, eBay shareholders are on their way to the Promised Land thanks to one of the truly great value-creators of our time.
 Now, Carl did not disclose the sample size of eBay shareholders that “Bernstein Research” surveyed, but we can say with certainty that it was not 100%: nobody called here.
 Furthermore, a 9% jump in a few weeks—based on the antics of a short-term shake-up artist—is actually small change to eBay shareholders who bought into eBay after John Donahoe became CEO of the company following years of degradation in the eBay auction platform, market share losses and investment underperformance bequeathed by Donahoe’s predecessor.
 Indeed, those investors who saw the value in eBay after Donahoe began to roll up his sleeves and get to work from the inside—many years before Carl decided it looked cheap enough to buy on the outside—were able to acquire one of the world’s most profitable and growing internet franchises at a mere 13-times forward earnings (and not “adjusted” earnings, either: 13-times just plain net after-tax earnings) and less than 10-times actual, real, cash flow.
 Even better: as things turned out, the patient shareholder who bought eBay back then was paying less than 8-times the earnings eBay would deliver by 2013, well after Donahoe’s turnaround had begun to take effect. 
 You can’t buy a bankrupt steel company for 8-times earnings in today’s market, what with all the money flying around, let alone a highly profitable, growing, global business.
 So life has been good for those eBay shareholders who trusted their cash to John Donahoe way back when, before Carl decided the company was a laggard and needed his magic touch.
 And those same shareholders might be forgiven if they do not trust Carl’s sudden and belated interest in their company, because they know his magic touch comes in the form of what Stephen Stills once called “the fisted glove.” 
 Carl, you see, has a chip on his shoulder.  Maybe even a chip on both shoulders.
 He doesn’t like the frat-boy, silver-spoon-type college grads who move up the corporate ranks simply because they are likeable, friendly guys who happen to know the right people. 
 It’s just his thing.  Carl does not like the corporate clubhouse.  
 And that’s understandable: his first attempt to infiltrate the corporate clubhouse in a big way—Trans World Airlines—ended badly, for pretty much everybody except Carl Icahn.  You can read the gory details here, but the entire 4,100 word article might be best summed up by its third paragraph:
 Ask any ex-staffer what went wrong with the airline, and you’ll get one answer: Carl Icahn, the corporate raider who took over TWA in 1985 and systematically stripped it of its assets.
 So when Carl unleashes his fisted glove on a company, they better be nice.  Tim Cook at Apple was nice: he listened to Carl, bought some stock back and had dinner with the man.   As a result, Carl tweeted friendly things about Tim Cook, even boasting about having dinner with Tim, like—well, like a frat boy boasting about having dinner with the College President.

 John Donahoe, apparently, was not as nice to Carl as Tim Cook, so Carl is mad.
 Hence the torrent of abuse in letters, tweets and on CNBC, all centered around accusations that one board member passed along corporate secrets to other board members; that the other board members used those secrets to compete against eBay; that eBay sold Skype at a lowball price to one of those secret-abusing board members; and that the entire eBay board of directors is a cesspool of bad corporate governance.
 As is often the case with Carl, the evidence he delivers to prove his points ranges from damning—particularly the sale of Skype at what does look in hindsight like a fire-sale price to an investor group that included the venture firm of an eBay board member—to downright amusing (he quotes an “eloquent” web site columnist in one salvo, and a “prominent technology writer” in another—like, who cares what they think?)
 But as any investor who bought eBay stock during the dark days, many years before Carl noticed it looked undervalued, would recall, Carl’s narrative of the Skype transaction is flat out wrong.
 An eBay investor from those days would recall that, for starters, 2009 was not an easy year to sell any business, let alone a “dotcom” business.  Lehman had collapsed seven months before eBay announced plans to spin off Skype to shareholders, and the world as we know it had very nearly ended.  Banks weren’t lending, investors weren’t buying, and money was scarce. 
 Even the great Carl Icahn wasn’t buying eBay stock, cheap as it was.   Nor was he interested in Skype, valuable as he now sees it to be, for that matter.
 The same long-term investor would also remember that eBay had written down the value of Skype to less than $2 billion—and yet managed to reach a deal that brought it $2 billion for only 70% of Skype, keeping a 30% share of Skype for eBay’s shareholders.  If the new owners managed to increase the value of Skype, eBay shareholders would benefit.
 The same investor would remember—vividly—the huge snag that nearly brought the deal down after it was announced, when Skype’s founders filed preliminary injunctions to prevent the sale.  Knowing how IP battles can kill a technology business, that investor would recall how the legal battle nearly scuttled the whole thing.  
 Not to mention that thanks to the eBay board’s decision to keep 30% of Skype for shareholers, the total price recognized by eBay after it was later sold to Microsoft would amount to $4.75 billion, for a business that eBay carried for less than $2 billion on its books at the time of the initial sale eighteen months before.
 Since Carl wasn’t, it seems, paying attention to eBay back then, it’s understandable he doesn’t recall the history of the Skype transactions, and why eBay shareholders at the time were happy to part with the distraction of a business that didn’t fit with the core auction business, or even the burgeoning PayPal payments business—at a price almost double its purchase price and more than double its value on eBay’s books at the time it was sold.
 It’s also understandable that Carl—who as we have seen likes to quote people, even random columnists, when it fits his opinion—didn’t quote the Wall Street analyst who, at the time of the initial sale of Skype in September 2009, said the price was “something of a surprise,” being higher than the carrying value on eBay’s books.   
 “A 14X deal multiple on EBITDA,” the analyst explained, “would seem to be a high multiple.”  Long-term investors recall that eBay’s stock was trading for less than 10X EBITDA at the time, so 14X seemed very good.
 Nor did Carl quote the September 9, 2009 American Banker reporting on the sale of Skype “to private investors for a higher-than-expected price [emphasis added].”
 None of those facts—the environment in which the transaction was carried out, the value eBay’s board extracted by keeping a piece of the action, and the general praise the deal received at the time—enters into Carl’s diatribe against eBay’s CEO and its directors, because those facts would contradict his entire thesis.

 We said at the start that Carl Icahn has—and he will be the first to remind you of this—created a lot of value in his life.
 Granted, the value he has created is not the tangible, Steve Jobs-type of value that actually helps people get through the day better, or faster, or easier, or less expensively than their parents did…the way eBay board member Scott Cook—the ex-P&G brand manager who sat down at his kitchen table and decided to create a product, Quicken—did.
 And it isn’t the kind of value that opens an entire new world…like that thing called the Internet, for which eBay board member Marc Andreessen helped create one of the first browsers and changed pretty much every life around the planet.
 Nor is it the kind of value that eBay board member Fred Anderson brought to Apple when, as CFO, he helped figure out how to fund the business by outsourcing production to low-cost manufacturers—this was back in the day when computer companies made their own boxes, by gosh—thereby turning Apple into a cash flow machine that would, one day, attract the attention of great investors like Carl Icahn, who saw at $500 a share something in Apple he did not see at $14 a share, where the stock was when Fred Anderson finally retired after transforming the way technology companies were run.
 And it isn’t the kind of value that Pierre Omidyar brought to, literally, the entire world when he helped connect collectors, small businesses and just plain folks around the world on a simple platform he wrote himself and named eBay.
 No, Carl doesn’t create “value” in the sense of making life better for everyday people.   He creates money for his investors and for the shareholders of his targets who go along for the ride, and for his fellow investors in Icahn Enterprises LP.

 Ah, and what is Icahn Enterprises L.P.?  Well, it is a limited partnership.  A massively successful one, of course.
 Like eBay, it is publicly traded—meaning anyone can buy into it and hitch a ride with Carl on his quest for “underperforming” public companies he can push around.
 Like eBay, it reports quarterly and annual results and holds quarterly conference calls with Wall Street analysts.
 And, like eBay, Icahn Enterprises has a board of directors and a chairman.  
 The board chairman’s name is familiar to the world—maybe more familiar than Fred Anderson, Pierre Omidyar, Scott Cook and Mark Andreessen combined: his name is Carl C. Icahn.
  The rest of the board of Icahn Enterprises L.P. is less familiar.
  Of the six directors not named Carl Icahn, there is a man who serves as “the Chief Operating Officer of Icahn Capital,” was “Controller at Icahn Associates Holding LLC” among other jobs, and “has been employed by Icahn Enterprises and its affiliates for 10 years.”  He also serves on the boards of two companies “indirectly controlled by Carl C. Icahn.”
 There is another man who has “significant business experience and a leadership role as a director in various companies including certain of our [Icahn Enterprise L.P.] subsidiaries.”
 There is yet another man who serves as a director of “a company in which Mr. Icahn has an interest,” and who also serves as director of “an externally managed, closed-end management investment company”—which a corporate governance maven would be forgiven for wondering if being a director of one investment company while on the board of an activist limited partnership investment management firm like Icahn Enterprises L.P. might not put him in the position of the kind of head-spinning conflict-of-interest Carl Icahn claims the eBay board members have.
 There is another man who “served in a variety of executive positions at Lear Corporation” from “2003 until July 2009,” which happens to be the same month Lear filed for bankruptcy, and who has—like the others—been a director of entities “each indirectly controlled by Carl C. Icahn” (in this case, six such entities.)  And another man who has  “served as a director and Chairman of the audit committee of several of our [Icahn Enterprises L.P.] operating segments...” 
 There is, finally, a man who has worked at Icahn Enterprises L.P. since 2006, and has served on the boards of nine entities that “each are indirectly controlled by Carl C. Icahn.”
 No doubt they are, to a man, highly accomplished and excellent in their roles.  But a corporate governance maven, reading those biographies and not knowing of Icahn Enterprise L.P. and its sterling track record, might be reminded of Mr. Potter’s comment on the Bailey Building & Loan’s sorry corporate governance practices in It’s a Wonderful Life: “You see, if you shoot pool with some employee here, you can come and borrow money.”

 Now, any shareholder of eBay would certainly be forgiven for remembering what Carl Icahn did with the once-proud Trans World Airlines and shuddering at the prospect of him getting his hands on the steering wheel at eBay.
And certainly any shareholder of eBay ought to be forgiven if they look at that list of directors at Icahn Enterprises L.P. and scratch their heads, wondering “Who the heck is this guy telling us how terribly conflicted our board of directors is?”
 They may well wonder why it is that every single director on the board of Icahn Enterprises L.P. who is not named Carl Icahn has connections to various Carl Icahn-related enterprises, while Carl himself—with a straight face—attacks their board for interconnections that he believes would cause them to seemingly lose all sense of business judgment when it comes to their duties as board members of a publicly traded entity.
 But more than that, in reviewing that list of directors at Icahn Enterprises L.P., they might very likely be reminded of what PIMCO CEO Bill Gross famously said to his erstwhile business partner, Mohammed El-Erian, as reported in a recent Wall Street Journal story about the behind-the-scenes breakup of the two men:
 “I have a 41-year track record of investing excellence,” Mr. Gross told Mr. Mohamed El-Erian, according to the two witnesses. “What do you have?”
  And comparing the eBay directors to the Icahn Enterprises directors, eBay’s shareholders might well think:
 “So we’ve got The Guy Who Helped Pioneer the World Wide Web, the Guy Who Created the Online Auctions Business, the Guy Who Helped Steve Jobs Save Apple, the Guy Who Dreamed Up Quicken, and the Guy Who Turned Around eBay on our Board.   Who’ve you got?”


Jeff Matthews, eBay shareholder since November 11, 2009.

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2013)    $4.99 Kindle Version at Amazon.com

© 2014 NotMakingThisUp, LLC  
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.

1 comment:

  1. I was a stockholder in American Real Estate over 20 years ago when Icahn basically robbed the public stockholders by doing an abusive stock offering above the market for which the only buyer was Carl Icahn. He thus managed to bag much of the big discount between book value and market value for himself as welling as getting a supermajority position for himself. The SEC protected the public by allowing this charade to go ahead (Carl hired an expensive lawyer).

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