Can Carl Icahn help or hurt BEA?
Billionaire investor has his sights on the software maker, but it's not clear whether he makes a difference to the companies he targets. Chart: Carl Icahn's financial wake
Last week, Icahn
A BEA representative declined to comment on the company's communications with individual shareholders, including Icahn, but said: "BEA maintains an active dialogue with all its shareholders and welcomes their views and opinions."
Icahn's recent move to increase his ownership stake inched him closer to triggering BEA's antitakeover defense, otherwise known as a shareholder rights plan, or poison pill. The poison pill would flood additional shares on the market and dilute his holdings, should his ownership stake hit the 15 percent mark. It's unlikely Icahn will cross that critical point.
BEA, of course, is just one of a number of companies Icahn has put in his crosshairs. But would BEA investors benefit from Icahn's involvement? If his recent track record is any indication, the answer would be "not necessarily." The results at two companies where Icahn has gained board seats within the last years have been disappointing: biotechnology company ImClone Systems has seen stagnant revenue and declining profits, while video rental giant Blockbuster has continued to endure falling revenue and lingering multimillion-dollar net losses.
Meanwhile, the financial conditions at two of his more high-profile targets, Motorola and Time Warner, have not substantially deteriorated since he moved on without a board seat. Revenue for Motorola's third quarter, which just ended, is expected to remain flat from the quarter before (when Icahn settled his board fight), while a $28 million second-quarter loss is expected to be followed by an $84.5 million profit, according to Wall Street estimates. And Time Warner's third-quarter revenue is expected to tick up by more than $1 billion to $11.5 billion, compared with the first quarter of 2006 (when Icahn gave up his play for a board seat), but Wall Street is expecting the media giant's third-quarter profit to fall to $915.4 million from the $1.5 billion profit from the quarter in which Icahn gave up his fight.
The mixed results extend to stock prices. Share prices at both Time Warner and Motorola remain about the same as when Icahn made his moves on the companies. But shares of the companies where he secured a board seat have had mixed results. Blockbuster's stock price is trading at roughly half the level it was when Icahn joined the board, and ImClone is up by nearly 25 percent.
"Some of the things he advocates is for improving the stock in the short term, but not necessarily managing the company for the long term," said one portfolio manager, who was approached by Icahn's representatives in both the Motorola and Time Warner investor call to arms. "Our time horizon is three to five years, and his time horizon is so much shorter."
But the portfolio manager, who spoke on condition of anonymity, said one of the more surprising aspects of both battles was a lack of sophistication Icahn's representatives appeared to have in understanding the businesses of Motorola and Time Warner.
"During conference calls, I was surprised his people often didn't know what they were talking about," the portfolio manager said. "They weren't as sophisticated as I thought they'd be on the companies' businesses."
Motorola, Time Warner and Blockbuster declined to comment. Icahn did not return repeated calls to his office and an e-mail.
Icahn isn't generally known for beating on the doors of technology companies, largely because the industry is often viewed as a growth sector with promising, and often pricier, stocks. So why Motorola and BEA? One portfolio manager noted Icahn may have been willing to make these tech plays because Motorola is viewed as having commodity products with its cell phones, while BEA is a midtier business software player stuck behind giants like SAP and smaller niche players like Salesforce.com. That's the kind of company he may believe he can squeeze out "value."
Despite his mixed record, it wouldn't be fair to say that Icahn has had no impact on companies that didn't give him board seats. Lawrence Harris, a wireless equipment and devices analyst for Oppenheimer, noted Icahn helped spur some operational changes at Motorola, in addition to prompting the company to undertake more share repurchases.
"He wanted the board to become more actively involved in the company and supervision of operations," Harris said. "There is some evidence to suggest that has happened."
Since the beginning of the year, Motorola's chief financial officer retired and was replaced, on an acting basis, by Thomas Meredith, an outside Motorola board member and former chief financial officer of Dell.
Meredith was named acting chief financial officer in March, a month after Icahn and his affiliates notified Motorola of plans to greatly increase their stakes in the cell phone device maker. Icahn and his affiliates informed Motorola in February they were filing to acquire in excess of $119.7 million and up to $500 million in additional Motorola shares, beyond the 1.39 percent ownership stake it held in January.
Even after Icahn's proxy battle to get a seat on the Motorola board failed in May, the device maker took a rather uncommon step in July by naming its No. 2 executive, Greg Brown, to its board of directors. Brown, president and chief operating officer, joined Ed Zander, Motorola CEO, on the board.
"Carl and his proxy contest was a wake-up call," said Harris, who noted that while Motorola has seen some financial improvements with its long-awaited 3G version for its popular Razr cell phone, the company is not out of the woods yet. The company, for example, faces stiff competition from Apple's popular iPhone.Icahn attacked Time Warner in 2005 on a range of issues, including calling for a large $20 billion stock buyback and spinoff of Time Warner Cable, as well as demanding an exclusive search deal between Google and Time Warner's AOL be nixed.
Last year, Icahn and Time Warner reached an agreement to call a truce, with Icahn canceling plans to launch a proxy fight with an opposing slate of directors and the media giant agreeing to increase its share buyback program to $20 billion, add two new independent directors to the board with input from major shareholders, including Icahn Partners, and set a goal of doubling its two-year cost-cutting efforts to a total of $1 billion as of the end of this year.
But one high-level insider who spoke on the condition of anonymity at Time Warner said Icahn's proposals were nothing new to the media giant and, in the end, had no significant net effect on the company.
"There was no disruption with the company. There was an agreement to do a stock buyback, but Dick (Parsons, Time Warner chief executive) was planning to do that anyway. There was the addition of two board members, but Dick was planning to do that anyway," the source said. "I think the investor world seemed to agree it was the nonevent of the century."
The source, however, acknowledged that Icahn comes to the table with specific ideas of what he wants the company to do to improve shareholder value, rather than offering up vague generalities.
"He just doesn't appear on the scene without specific ideas of what management should do to increase shareholder value, whether it's selling part of the business, buying back stock, or adding more debt to buy back more stock," the source said.
Icahn also had a list of specific ideas when he took on biotechnology company ImClone Systems. Shortly after his arrival on the board, Icahn was named chairman and was the driving force behind a number of significant operational changes at ImClone that have benefited the company, said Dr. David Sidransky, an ImClone director who served on the board prior to Icahn's arrival and has stayed on.
"The board was divided with different strategic alternatives in mind," Sidransky said. "Although he was in the minority...he presented a plan and said this is what I want, and this is how I want to achieve it. He got people interested in that plan and eventually gained a majority support on the board."
Icahn, during his proxy fight, advocated taking ImClone's core cancer drug Erbitux, which is used for combating head and neck cancers, and aggressively expanding trial tests for other uses. The former corporate raider also called for finding a permanent CEO after a lengthy period with an interim CEO and tying executive compensation more tightly with ImClone's stock price.
"Carl is very convincing and has passion. He convinced me that we could do it--that we could get the drug going and expand the company. We've since hired a competent CEO and the right management," Sidransky said. "This is a complete turnaround. This board is going in a completely different direction now, than before Carl came aboard."
Analysts who follow ImClone hold similar views. During the proxy battle, Icahn believed management was not aggressively pursuing promising pharmaceutical candidates, nor seeking new uses for its main cash cow--cancer drug Erbitux.
"Mr. Icahn felt ImClone had some promising candidates that weren't being pursued as aggressively as they should (with clinical studies)," said Brian Rye, a biotech analyst with Janney Montgomery Scott. "But we've seen a pickup in the pace in the last couple of months, and the hope is down the road they'll see improved profits."
Icahn also has played a role in bringing stability to ImClone's management, Rye said. The company's interim CEO resigned a day before Icahn was appointed chairman of the board last October. Last month, the company hired a former Johnson & Johnson executive, who had headed its biopharmaceutical unit.
"He wanted a permanent CEO with a good track record and brought in the head of Johnson & Johnson's worldwide biopharmaceutical unit," Rye said, adding, "ImClone's stock has moved up as investors feel a greater comfort level with the management structure."
ImClone's stock also has risen recently, following studies that show Erbitux is effective in fighting lung cancer, Rye said.
Blockbuster analyst Stacey Widlitz, a research analyst with Pali Research, said while Blockbuster's stock has not performed well since Icahn's arrival on the board, he has made the company's management more accountable.
Icahn and Blockbuster former CEO John Antioco agreed on the strategy for the company, but fought over accountability and compensation issues, Widlitz said.
"They now have new management with a reasonable compensation package that is tied to performance of the company and appropriate," she noted. "He also hired someone with an eye toward profitability and who has led turnarounds before. Under the old management, you had someone who was throwing money at advertising without asking what is the (return on investment)?"